
Book tAfTg 



The Art of 
Wall Street Investing 



BY 

John Moody 

Author of 

"The Truth About the Trusts," 

"The Investor's Primer," 

"Moody's Analyses of Railroad 

Investments," etc. 



Moody's Magazine 

New York, 1909 



Copyright, 1906, by 
JOHN MOODY 
All rights reserved 



** 



^ 






Preface 

ALTHOUGH the popular impression is 
probably the reverse, it is certainly a 
fact that a greater sum of money is annually 
lost in this country through unwise investment 
in Wall Street, than through pure speculation. 
While fortunes are daily jeopardized and dissi- 
pated through speculation in stocks, bonds, 
grain-futures and like ventures, yet the many 
sums, large and small, which annually leave 
the pockets of actual investors are far greater 
in amount. Indeed, I would almost say that 
the losses incurred through "unwise Wall 
Street investing" are easily tenfold the losses 
occasioned through mere speculation on the 
exchanges. 

And furthermore, the losses resulting from 
unwise investing are far more important to the 
community at large; for while speculative 
losses are in a sense anticipated, the losses 
through mistaken investments are usually un- 
expected and unprepared for. Speculative 

iii 



iv PREFACE 

losses often represent the loss of money easily 
gained, either through former speculations or 
from other sources, but the average loss of the 
investing public is generally a loss of hard- 
earned or industriously accumulated savings; 
and therefor such losses are felt more deeply 
by the community. 

The Art of Wall Street Investing involves 
two important primary principles. The first is 
to place one's principal where it will be en- 
tirely secure, and the second, to gain as large a 
percentage of return as possible without in 
the least disturbing or lessening the security 
of the principal. The moment the status of the 
principal is changed for the purpose of enhanc- 
ing the rate of return, the transaction ceases to 
be a pure investment and becomes more or less 
of a speculation. Thus, analyzed in its sim- 
plest form, we may put it down as axiomatic 
that only those are legitimate investments 
where the primary motive is the safe securing 
of one's principal and the rate of return thereon 
is looked upon as secondary. A speculation, 
on the other hand, is where the desire for large 
profit is so strong that the safety of the prin- 
cipal becomes in effect a minor consideration. 
That is to say, the person investing or specu- 
lating may regard his principal as secure but is 



PREFACE v 

willing to place it at considerable risk in order 
to increase his profit. The securing of the 
principal, therefor, is the first and chief matter 
to be considered in investing money. 

Looked upon in this light, it will be seen that 
the matter of investing money wisely is a most 
important as well as a most difficult art, and 
therefor well worthy of careful examination. 
The ideas and suggestions embraced in the fol- 
lowing pages are the concrete result of sixteen 
years' experience and study of Wall Street 
conditions and methods ; and while it may ap- 
pear to some that the writer is too conserva- 
tive in his attitude towards investing methods 
in general, yet careful thought should convince 
every reader that it is the part of safety and 
prudence to be securely on the side of con- 
servatism in Wall Street investing, rather than 
the reverse. 

In the following chapters the general sub- 
ject of Wall Street investing is treated in as 
practical a way as possible. The fundamental 
principles of investing are carefully examined, 
and their importance emphasized. It is in- 
tended that the book shall not be merely a 
treatise on the abstract or theoretical side of 
investing, nor that it shall merely give a sur- 
face view of the investment field. Rather is it 



vi PREFACE 

intended to make the book of general use as a 
practical hand-book or guide for those who 
wish to place their money in legitimate corpo- 
rate enterprises of the several kinds, through 
the purchase of stocks and bonds. Not only 
are the different classes of securities them- 
selves described, but careful explanations are 
given of the machinery and methods of invest- 
ing throughout the various Wall Street chan- 
nels. 

In the general arrangement and composition 
the valuable co-operation of Mr. John F. 
Hume, author of a book now long out of print, 
entitled "The Art of Investing," is hereby pub- 
licly acknowledged. 

JOHN MOODY 



CONTENTS 



Chapter Page 

I. Safety and Security 9 

II. Bonds and What They Represent . 33 

III. Stocks and What They Are 59 

IV. Analyzing Railroad Securities 75 

V. Industrials and Tractions 99 

VI. Investment vs. Speculation. ....... 105 

VII. "Get-Rich-Quick" Schemes in 

VIII. Reorganizations and Syndicates. . 125 

IX. The New York Stock Exchange. . 135 

X. Wall Street Phrases and Methods. 153 



The Art of Wall Street Investing 
I 

Safety and Security 

UNLESS he has had much previous ex- 
perience, the prospective investor who 
wishes to put his money at work through Wall 
Street channels, will be confronted at the outset 
with the questions of "safety" and "security." 
Knowing only more or less definitely, that he 
ought not to expect a return of more than four 
to five per cent., if he wishes to invest his 
money securely, he naturally seeks more ex- 
pert advice from a banker, broker or general 
dealer in investment securities. And he is wise 
is doing this, provided he exercises good judg- 
ment in the selection of the broker or dealer. 
But brokers and dealers in investment securi- 
ties are, of course, not infallible; their judg- 
ment is sometimes biased, and they may, for 
one reason or another, give unsound advice. 
Hence it is all the more necessary that the 



io ART OF WALL STREET INVESTING 

investor should inform himself regarding the 
merits of a given security, as well as train him- 
self in the art of analyzing investments in gen- 
eral. 

The truth is, that while there are certain 
fixed rules for proper guidance, every bond 
must he judged by itself in order to be analyzed 
correctly. For instance, a man may be advised 
to invest only in "first mortgages," on the 
hypothesis that by putting this limitation upon 
his field of investment, he will thereby insure 
its safety. But such advice, applied broadly 
and without qualification, is essentially un- 
sound. A fourth, fifth or tenth mortgage on 
some properties may be far more secure than a 
first mortgage on others. For instance, the 
Reading Company 4s, selling at 104, are a much 
safer security than were the first mortgage 
bonds of the Centralia & Chester RR, issued 
in 1895, altho the former are an eighth mort- 
gage on parts of the main-line of the Reading 
system and were originally a first mortgage on 
no part of the property. Yet they are well 
secured, while the other bond defaulted early 
in its life and its holders were obliged to sacri- 
fice a large part of their principal in the re- 
organization which followed the default. Thus 
it will be seen that to merely advise the in- 



SAFETY AND SECURITY f* 

vector to confine his investments to first 
mortgages may be most misleading. 

Another unsafe method of judging the safety 
of bonds, is to assume that because they are 
secured on part of a large railroad system and 
"underlie" one or more issues of secondary 
bonds, their security is absolutely assured. 
This, like the former theory, contains some 
vital Haws, and while it holds good in the 
majority of instances, if followed in others, 
brings very disastrous results. Many large 
and important railroad corporations absorb 
tributary or competing lines under one plan or 
another, but they do not always guaranteed 
the securities of these lines. Bond issues are 
frequently "assumed" by a controlling com- 
pany, according to statements circulated, but 
unless they have been specifically guaranteed, 
either by the acquiring corporation or by some 
other equally responsible concern, it does not 
necessarily follow that the credit of the latter 
is back of the security at all. The acquired 
line may turn out an unprofitable and losing 
investment, with the result that the larger or 
controlling line will want to either unload its 
burden or scale down the obligations of the 
branch to a sum approximately less than the 
latter is currently earning. There are many 



12 ART OF WALL STREET INVESTING 

methods whereby this can be done, as has been 
proven many times. It is vital, therefor, that 
the investor should base his entire judgment 
of value on the property itself, regardless of 
the parent company, unless indeed the latter 
has absolutely assumed and guaranteed the 
principal and interest of the bond. 

A third error, which is very common, is to 
assume that because a bond is listed on one or 
more of the stock exchanges, it is therefor 
safer or in better standing than otherwise, 
Such a notion is entirely unsound, as there are 
far more bonds of the highest grade and of the 
best security traded in on the various markets 
outside of the exchanges themselves, The 
chief advantage of a security being listed on 
an exchange is that it thereby secures a fixed 
quotation, but the fact of its being listed does 
not bear upon its safety in any way. While it 
is true that many of the best secured bonds and 
stocks are listed on the exchanges, it is also 
true that many of the least secure are listed as 
well. 

In contemplating an investment in a given 
security, each case should be judged on its 
own merits. In the case of a railroad bond., it 
is not the question of whether the issue is a 
first mortgage or a blanket mortgage, but 



SAFETY AND SECURITY 13 

whether the value of the property on which it 
is secured is sufficiently in excess of the 
amount of the mortgage, and whether the in- 
come from the property is sufficiently in excess 
of the amount required for meeting the interest 
on the bonds and all prior obligations. And in 
defining value, we mean, of course, permanent 
earning power, for it is chiefly the permanent 
or growing earning power that makes the 
value. For instance, the New York, New 
Haven and Hartford railroad lines, between 
New York and Boston, are bonded and capital- 
ized for an amount far in excess of the cost of 
replacing the actual movable property of the 
company. But there are other assets besides 
rails and equipment which make railroad 
property valuable. These are its location, its 
exclusive rights of way and terminal sites or 
privileges. It is from these that flow its chief 
earning power. The six hundred odd miles of 
railroad in the New Jersey Central system 
may not represent much more movable prop- 
erty than a like mileage of railroad in Mexico, 
and may not have originally cost much more 
to build. But the vast difference in value will 
be found in the location, in the value of the 
land, a value which has been created by the 
influx or growth of population. This is such 



14 ART OF WALL STREET INVESTING 

an important factor that the value of a prop- 
erty at once appreciates if a tendency towards 
more rapid growth appears, while it tends to 
fall in all cases where the contrary tendency 
develops.* 

The rights of way and terminal sites and 
privileges are therefor the first features to 
bear in mind in analyzing the earning power, 
or value. And it must also be borne in mind 
that it is the permanent, or average, earning 
power rather than the possible temporary in- 
come which is to be considered. By perma- 
nency is meant a matter of generations, rather 
than years. Most railroad bonds, nowadays, run 
from 40 to 100 years, and the investor must 
naturally be assured that there is not likely to 
be any real depreciation in the property, if 
properly maintained, in the generations to 
come. His first thought, then, must be to 
ascertain if the influx of population around and 
along the lines of the property promises to 
continue indefinitely; and at the same time 
he must determine whether the value of 
and the surrounding land is such that the cre- 
ation of a rival right of way is out of question. 

♦(This effect of population on land values is "brought out 
most clearly and scientifically in a book recently written by 
Richard M. Hurd, President of the Mortgage Bond Co., New 
York, entitled "Principles of City Land Values.' ' Copies 
supplied by The Moody Corporation, $1.50 each.) 



SAFETY AND SECURITY 15 

In other words, his fundamental asset (the 
site) must be practically exclusive, for it is the 
condition of exclusiveness that gives it most 
of its value. 

Having assured himself as to this, his next 
care will be to see that the probable average 
earning capacity of the property in the poor- 
est times is well in excess (50 per cent, at 
least) of all requirements for interest on this 
mortgage and all prior charges, as well as for 
full maintenance of the property in every re- 
spect. The investigation of this phase of the 
enterprise is frequently a difficult one, as re- 
ports and income accounts are often so mis- 
leading in arrangement and make-up that the 
careless investor is frequently deceived by an 
elaborate display of figures which may mean 
very little. In Chapter IV, "Analyzing Rail- 
road Securities," this subject of railroad ac- 
counting is referred to in full detail. 

But even though the investor has thoroughly 
informed himself regarding the above char- 
acteristics, there are many other uncertainties 
which are to be avoided or overcome. How- 
ever, if he has been careful to see that the 
conditions described above are all present in 
a given investment, his chances of losing his 
money will be reduced to a minimum. If, on 



i6 ART OF WALL STREET INVESTING 

the other hand, he neglects these precautions, 
and adopts other rules for analyzing the secur- 
ity or puts his trust in the "say-so" of this or 
that authority, then he stands in great danger 
of sooner or later coming to grief, as will be 
shown in the following pages. 

Many years ago the careless legislation of 
many of the States permitted railroad and 
other corporations to decide for themselves, 
absolutely without restriction, the amounts of 
obligations they might put out, and therefor 
it was no wonder that the privilege was 
abused, and the making of shares and bonds, 
the latter represented to be amply secured by 
mortgage liens, were carried to criminal ex- 
cess. One illustration will suffice. 

The old Arkansas Central Railway com- 
pany., located in the State of Arkansas, built 
only forty-eight miles of its projected road. 
The road was of narrow gauge, with very light 
iron, and in every way cheaply constructed. It 
cost less than ten thousand dollars per mile, 
including equipment. As has been the case 
with most companies building railways in new 
territory, help in its behalf was asked from the 
communities to be benefited, and their bonds, 
amounting to nearly half a million dollars, 
were given it by the counties, cities, etc. Under 



SAFETY AND SECURITY 17 

a statute providing for aid to railroads when 
their beds could be utilized for levee purposes, 
the company got $160,000 of State bonds. 
Under another statute it got, as a loan from 
the State, the latter's bonds to the amount of 
$1,350,000, which were to be a first lien on the 
property. After such abundant assistance, it 
would have appeared hardly necessary for the 
company to put out obligations of its own. 
However, it proceeded to market and issue its 
own debentures to the amount of $2,500,000, 
of which $1,200,000 purported to be secured by 
first mortgage, a representation that, for rea- 
sons already stated, was not correct. In addi- 
tion, a considerable amount of stock certifi- 
cates were issued. Altogether, nearly $5,000,- 
000 of paper was put out and negotiated on the 
basis of forty-eight miles of narrow-gauge 
road. But this proved to be insufficient. The 
road, for non-payment of interest on its bonds, 
soon passed into the hands of a receiver, who 
found it in such an unfinished state, that with 
the court's permission, he issued a considerable 
amount of his own certificates to provide for 
necessary repairs and betterments. Then the 
road, the product of such an outlay, was sold 
at public auction and brought the magnificent 
sum of $40,000, which was paid, not in cash, 



18 ART OF WALL STREET INVESTING 

but in receiver's certificates that had been pur- 
chased at a great discount from their face ! 

Twenty or thirty years ago, nearly all first- 
class securities, outside of "governments" and 
"municipals," were steam railroad bonds and 
stocks. But we now have stocks and bonds 
upon the market representing nearly all con- 
ceivable kinds of property, industrial and 
manufacturing companies, telegraphs, tele- 
phones, gas, electric light and traction compa- 
nies, water-works, bridges, oil and gas wells, 
factories and mills of every description, patent 
rights of all sorts, steamboat lines, apartment 
houses, realty enterprises, and even ceme- 
teries. And not only are properties of many 
kinds used to issue bonds on, but many kinds 
of bonds are often issued upon the same prop- 
erties. Thus we find among our railroads and 
other corporations not only first, second and 
mortgages, but income bonds, debentures, 
convertible bonds, consolidated bonds, redemp- 
tion bonds, renewal bonds, terminal bonds, 
divisional bonds, sinking fund bonds, "blanket- 
mortgage" bonds, collateral trust bonds, equip- 
ment bonds, participating bonds, joint bonds, 
and bonds ad nauseam until they lap and over- 
lap in seemingly endless complication. Not 
that merely, but one issue of bonds is some- 



SAFETY AND SECURITY 19 

times made the basis of other issues. Indeed, 
one of the money-making devices of the time 
is the formation of companies that issue their 
bonds on the security of the ether people's 
bonds that they have purchased, either yield- 
ing a higher rate of interest or obtained at 
lower prices than they expect to realize for 
their issues. There seems, in fact, to be no 
limit to the production of securities that are 
spread before capitalists and investors. There 
never was a time when it was so easy to invest 
money and to lose it. Of the securities that 
are offered with first rate recommendations, it 
is probable that about one-third are actually 
good, one-third have some value, and one-third 
are practically worthless. Hence the very nat- 
ural inference that whatever art there may be 
in the matter of investing is to be exercised 
chiefly in the avoidance of unworthy offerings, 
and it is to that point first that a profitable dis- 
cussion must be mainly directed. 

For the condition of things described, the 
laws of some of our States in giving corpora- 
tions almost limitless power to issue negotiable 
paper, as well as in permitting all sorts of com- 
panies to incorporate themselves, are, undoubt- 
edly, very largely to blame. Our banks are 
closely watched and very properly restrained 



20 ART OF WALL STREET INVESTING 

from taking people's money on false pretenses; 
but is it much better for industrial and other 
corporations to take it by means of legalized 
fictitious evidences of value? Banks and insur- 
ance companies are by no means the only insti- 
tutions that need watching. One of the re- 
forms that would seem to be worth considera- 
tion is legislation prohibitory of the creation 
by companies existing by authority of law of 
stocks and securities not representing cash 
actually paid into their treasuries, or proprie- 
tary interests whose values are to be deter- 
mined by disinterested parties. Texas has in- 
corporated substantially such a provision in 
her constitution. Her example should be fol- 
lowed by all other commonwealths. 

But the security behind or beneath the de- 
benture or other paper obligatory is not the 
only thing to be looked into by the investor. 
Even the form of the document may be import- 
ant. A case in point, inasmuch as it shows how 
the preparation of an undertaking for the pay- 
ment of money may change its apparent value, 
would seem in this connection to be appropri- 
ately quoted. Some years ago certain town- 
ships in the State of Missouri were desirous of 
aiding the construction of railroads with their 
credit. The State Legislature, to that end, 



SAFETY AND SECURITY 21 

passed an act authorizing the issue and sale of 
bonds obligatory upon them ; but it was stipu- 
lated — a very singular provision — that, instead 
of being put out by the townships, the bonds 
should be executed by the officials of the coun- 
ties in which they were located. Accordingly 
debentures aggregating several million dollars 
were thus prepared and disposed of. The bonds 
bore the seals of the counties and the signa- 
tures of their officials, On the back and at the 
top of each signature, in large letters, were the 
words "county bond." The instrument began 
with the recital, in the usual form, that it was 
issued by the county, but farther on, and in the 
smallest type employed, came the statement 
that it was executed for and in behalf of a cer- 
tain township, which alone was to be responsi- 
ble for its payment. These bonds were exten- 
sively advertised as "county bonds," and prob- 
ably in most instances, certainly in many, were 
sold as such, and it was not until purchasers 
parted with their money, that they discovered 
that, instead of getting the bonds of wiell 
known and wealthy counties, they had secured 
only the obligations of townships they had 
never heard of before. It was then manifest 
enough that they had been made the victims of 
a piece of very sharp and very shabby practice. 



22 ART OF WALL STREET INVESTING 

In jiany cases the buyers of bonds and other 
securities learn, when it is too late, that their 
purchases, owing to some obscure and appar- 
ently innocent passage that had been over- 
:ed or disregarded, are very different from 
what they thought they were getting. How 
often have careless investors that supposed 
they were purchasing undertakings that 
would be good for long terms of years, and 
probably paid premiums to obtain them, ascer- 
tained at the end of comparatively short inter- 
vals that they were forced to accept in pay- 
ment the amounts nominated in the bonds in 
consequence of unnoticed clauses giving their 
makers power to redeem their option ! The 
lesson of such cases is obvious enough. It is 
that no one should buy a bond or stock without 
first having carefully read the certificate. This 
may seem like an unnecessary warning; but in 
truth it is a most material one. Thousands and 
thousands of dollars have been lost by the neg- 
lect of this simple precaution. "I didn't read 
the bond" is the explanation that has again 
and again been offered when time has disclosed 
a different investment from the one intended 
to be paid for. / The fact is that comparatively 
few unprofessional bond and stock purchasers 
ever carefully examine the instruments they 



SAFETY AND SECURI 23 

acquire. They look at the headings, those 
parts that are in big letters, and take the rest 
for granted. It is a most unwise practice. 
Unless you are previously familiar with the 
document in all its parts, don't fail to read it 
before you buy. Read it all, the little type as 
well as the big type, the indorsements, the 
coupons, and all. Don't take somebody's else 
word for it. Examine the seal, the signatures, 
and even the embellishments. Something may 
be disclosed that will change your mind and 
save your money. 

But if there are tricks in the making of 
securities, even more are to be apprehended 
in the selling of them, and should be guarded 
against with corresponding diligence. It is a 
notable fact that no poor securities are ever 
offered. They are always good so long as they 
are on the market. It is only after they have 
been purchased that they prove to be worth- 
less. Interest has never been known to fail 
on bonds that are seeking investors, although 
default has sometimes followed very closely 
on the sale of the last obligations. Indeed, it 
is no secret that interest is sometimes paid out 
of the proceeds of the bonds, the purchasers in 
this way getting a portion of their own money 
back while the process of marketing them is 



24 ART OF WALL STREET INVESTING 

going forward, although such a thing has sel- 
dom been known to happen after the entire 
issue has been disposed of. The advertise- 
ments of some bond-sellers are often marvel- 
lous productions. No such securities as they 
have to offer have ever been on the market 
before. They are absolutely safe; they pay 
extra rates of interest, etc., etc. The wonder 
is that with so much capital seeking invest- 
ment, it is found necessary to advertise such 
perfections at all! In such cases it is hardly 
necessary to say that the only safe rule for 
investors is to find other uses for their money, 
however strong the temptation may be. 

A common expedient of bond-makers and 
bond-merchants is to fortify their issues with 
the favorable opinions of eminent lawyers. 
This is particularly the case when the obliga- 
tions of municipalities or of companies that 
are dependent upon contracts with municipal- 
ities are offered, some municipalities having in 
the past shown an unpleasant disposition to go 
back on their undertakings. No exceptions 
can be taken to the practice referred to, as 
counsel learned in the law should in such 
cases always be consulted; but the writer has 
to say that he has never yet known a security 
so poor that a lawyer's opinion could not be 



SAFETY AND SECURITY 25 

had to back it. Such testimonials should be 
taken for what they are worth, and no more. 

When so many seductive baits are offered; 
so many nets and traps, contrived and con- 
structed by clever brains and cunning fingers, 
are spread for the capture of those having 
money, is it surprising that the careless and 
credulous are victimized, and even that the 
sagacious and prudent should sometimes be 
taken in? Nevertheless, for the losses they 
have sustained, investors, as a rule, have them- 
selves chiefly to blame. The mistakes made, in 
nine cases out of ten, have been the purchase 
of "cheap" securities. The hope of realizing 
a little more than ordinary interest, by buying 
paper at a discount, has proved to be the rock 
on which unnumbered capitalists have split. 
In addition to their money's worth, they have 
endeavored to get something for nothing, with 
the result of most generally getting nothing 
for something. . It is remarkable how blind are 
people, ordinarily sagacious enough to make 
money, to the fact that property cannot pay a 
revenue beyond its producing capacity. For 
instance, how can a trolley company, whose 
line is wholly or mainly built from the proceeds 
of mortgage bonds, sell them at a heavy dis- 
count, besides allowing large commissions for 



26 ART OF WALL STREET INVESTING 

the selling, and then pay both this interest 
and dividends on a large issue of watered 
stock? Or how can a poor agriculturist, occu- 
pying a half -improved farm cut on the frontier, 
with a family to support and grain selling 
barely above the cost of production, pay ten 
or twelve per cent, upon the capital with which 
he does business? 

By what rule or rules is the investor to gov- 
ern himself. No formula can guarantee him 
absolute safety. One thing, however, he can 
properly count upon, viz., that he must expect 
to pay a fair price for a good security — one 
that will return him no more than a moderate 
interest on his money. If he wants to specu- 
late and is willing to take risks, that is another 
thing. He can then look for bargains. The 
capitalist or investor who sends his money into 
a new section, or puts it into a new mechanical 
process, or a new constructive enterprise, may 
or may not make a hit, but for the ordinary and 
conservative operator, the conditions of the 
commercial and financial world give warning 
that only reasonable profits are to be looked 
for. The first and main thing to be studied is 
safety. And yet there is such a thing as going 
too far in the matter of prudence. The in- 
vestor may pay too dearly for safety. There 



SAFETY AND SECURITY 27 

are securities which, compared with others 
that are to be had, sell at prices much above 
their real worth. The reason is that everybody 
knows them to be good, and investors who 
don't want to take the trouble to investigate, 
or are afraid to trust both their own judgment 
and the counsels of their friends, are willing to 
pay extra prices for them. But there are 
plenty of others that may be had at lower fig- 
ures, which are just as good. There is no 
reason in the world why the investor should 
not safely invest at a rate that will generally 
yield him 4 per cent, to 5 per cent, interest, and 
have his investment as secure as any property 
can be under human supervision. As here- 
tofor stated, with the creation of new enter- 
prises and properties, and the development of 
old ones, new securities are constantly appear- 
ing in this country and a fair share of them 
ought to be good. Indeed, our securities ought 
to be the best in the world. The sure and rapid 
growth of our resources supplies a reliable sup- 
port as long as fair intelligence and common 
honesty attend their production. The only 
thing is to choose with discretion, so many 
doubtful and even fraudulent issues appearing 
at the same time; but no more judgment is 



28 ART OF WALL STREET INVESTING 

really demanded than in purchasing lands or 
cattle. 

Two common and often fatal mistakes 
should be avoided. One is in relying solely 
upon the advice of another. No one compe- 
tent to form an opinion for himself should put 
his pecuniary interests unreservedly in the 
keeping of another. Such absolute confidence 
invites betrayal. By far the greater number of 
losses to investors have been in securities pur- 
chased exclusively on the recommendation of 
interested outside parties. While it is well to 
get the opinion of a reputable broker, the pur- 
chaser should investigate for himself. The 
other mistake is to uniformly give preference 
to listed securities. As pointed out at the be- 
ginning of this article, many persons seem to 
think that stocks and bonds must have a value 
if they are quoted at some stock exchange, for- 
getting how many fancies have been bal- 
looned until they have burst at such places. 
On the contrary, such a position is likely to ex- 
pose them to manipulation for purely specula- 
tive purposes. Stock-exchange quotations are 
often unsafe guides to buyers. They represent 
not merely the value of the property but also 
the pitch of speculation at the time. When 
securities are converted into foot-balls for 



SAFETY AND SECURITY 29 

gamblers to play with, they are pretty certain 
to be too high or too low. The main advantage 
they can have is a readier marketability in case 
of an urgent need to sell ; but it is at the times 
when such need is likely to exist that they are 
pretty certain to be at the lower point. No 
speculative help can long take the place of real 
value. Securities, in the long run, must stand 
upon their merits, and purchasers have merely 
to follow business principles as taught by the 
canons of common sense. 

In seeking investments, and especially long 
time investments, there are several things to 
be taken into account. There is not only the 
question of the kind of security to purchase, 
but the question of the time of purchase. There 
are opportunities to be looked for as well as 
pitfalls to be shunned. It is during periods and 
seasons of depression, when securities are 
forced upon the market, often to be sacrificed 
— and such opportunities are certain to come 
if waited for long enough — that the shrewd 
investor finds his richest harvest. That, how- 
ever, cannot be said of the ordinary investor. 
He usually buys when securities are up and 
confidence is unimpaired, and becoming fright- 
ened as the market values go down, sells when 
they are at the bottom, and holds his money 



30 ART OF WALL STREET INVESTING 

to reinvest in something else no better, and 
probably not as good, when the tide has 
turned. As a rule, the best time to invest is 
when others are unloading. In money matters 
it is never safe to follow "the crowd." Nor is 
it safe, (which is little more than the expres- 
sion of the same idea in another form) to pur- 
chase a security when it is on the "boom." A 
peculiarity of our money market, conservative 
as it is popularly supposed to be, is that it is 
constantly changing its favorites. Its offer- 
ings come in waves. Its dealings at one time 
may be chiefly in railways, at another in indus- 
trial obligations, and at another the excitement 
may run to mining shares or mortgages on 
ranches and real estate. For the time all pro- 
fessional brokers and bond and share sellers 
urge their customers to adopt the popular 
issue, of which, as the result of the increased 
demand, there is almost certain to be exces- 
sive, if not fraudulent production. To yield 
to the pressure of such a time is always risky. 
Old and tried securities, like old friends, are 
likely to be the truest and best. 

One thing the investor would do well never 
to forget, is that there are always plenty of 
good securities in the market. No one with 
money need ever fear that others will get all 



SAFETY AND SECURITY 31 

the solid investments, and, in the apprehen- 
sion that there will not be enough cf that sort 
to go around, put up with an inferior article. 
Don't let him choose what is not altogether 
satisfactory, under the impression that nothing 
else as good or better will offer. If he does so, 
sooner or later he will regret it. Something 
good always comes to him who waits with 
money in his hand. 

Another thing of a precautionary nature it is 
well enough for the investor to do, and that is 
to scatter his purchases. The old adage about 
not putting all the eggs in one basket applies 
with peculiar force to investments. The tenden- 
cy with those having moderate sums to invest, 
and who need to be the most circumspect, is 
to make up their minds in favor of a single line 
of securities and put everything there. Of 
course, a failure in that quarter is particularly 
disastrous. The writer knew a man, some 
years ago, who decided in favor of municipal 
obligations, saying that he had satisfied him- 
self that, en the whole, there was nothing else 
so reliable. Accordingly he put his entire 
available means into them. But practicing 
abundant precaution, as he supposed, he 
divided his money equally among municipal 
issues of Illinois, Missouri and Kansas, they 



32 ART OF WALL STREET INVESTING 

having the most paper at that time on the 
market. He thought he was entirely safe as to 
principal. But soon after a wave of repudiation 
sentiment swept over that part of the country, 
and every one of his bonds were left in default. 
It is well enough to scatter in kind as well as 
in locality. 

Against the theory of scattering investments, 
men sometimes quote the advice of Andrew 
Carnegie to "put all your eggs in one basket, 
and watch the basket." This principle, how- 
ever, while sound enough for the expert or 
specialist who is in a situation to at all times 
see and watch the basket, is not applicable to 
the average ordinary investor. The average 
investor simply cannot "watch the basket" in 
the way implied by Mr. Carnegie, and there- 
for it is a safe principle for him under all ordi- 
nary circumstances, to limit his chances of loss 
to the greatest possible extent through a wide 
and judicious distribution of his capital. 



II 

Bonds and What they Represent 

T5 ONDS are issued on all kinds of property 
*^ and are usually secured by a mortgage 
of some kind. There are, however, certain 
classes of bonds, such as "governments" and 
"municipals," the principal of which is secured 
entirely in other ways. It will be of interest 
and profit to briefly point out the earmarks of 
these different classes of bonds. 

Bonds are usually issued in denominations 
of $1,000 each, though sometimes issued for a 
larger or smaller amount. Some bonds bear 
coupons and some are what are known as 
registered bonds. The interest on the latter is 
always paid directly to the registered owner 
by check, in the same manner that dividends 
are paid. 

A first mortgage bond is always secured by 
a deed of trust, and directly covers the prop- 
erty on which it is secured, without being sub- 
ject to any other lien. There may be other 

33 



34 ART OF WALL STREET INVESTING 

bond issues secured on the same property, but 
their lien is entirely subsequent to the first 
mortgage. Because a bond is a "first mort- 
gage" one should not necessarily assume that 
it is a "gilt-edged" security. True, it is bound 
to be better than any other bonds secured on 
the same property, but the property itself may 
not be worth the amount of the mortgage, or 
the business may not be earning enough to 
pay the interest as it falls due. 

A second mortgage bond, is, as its name 
indicates, always secured subsidiary to the 
prior, or first mortgage. If the first mortgage 
completely covers the value of the property, 
then of course, the second mortgage has an 
inferior standing only. But many first mort- 
gages amount to only a portion of the value of 
a property, and in these cases a second mort- 
gage is frequently well secured and attractive 
as an investment. To illustrate: A property 
worth $10,000,000 and earning $800,000 per 
year may have issued a first mortgage amount- 
ing to $1,000,000, and carrying an interest 
charge of $60,000 per year. Such a first mort- 
gage bond would be regarded as high grade. 
The company may then have issued a second 
mortgage amounting to $2,000,000, and carry- 
ing an interest charge of $120,000 per annum. 



BONDS AND WHAT THEY REPRESENT 35 

In this case the second mortgage bond would 
be high grade also, as the aggregate amount of 
both mortgages would be but $3,000,000 on a 
property valued at $10,000,000, and the total 
interest charge of $180,000 would leave a sur- 
plus, (based on earnings of $800,000 per year) 
aggregating $620,000, or more than 3^2 time:: 
the interest charge itself. On the other hand, 
if a property, the value of which was but 
$4,000,000, with annual earnings of but $240,- 
000, should issue first and second mortgages of 
the character and amounts mentioned above » 
not only would the second mortgage bond be 
of doubtful quality, but the first mortgage 
itself would be regarded as very far from 
"high-grade." 

Third, fourth and fifth mortgages, etc., are ; 
as their names indicate, secured subsequent to 
the several preceding issues and require no 
separate comment, except that the mere fact 
of their being subsidiary to several issues does 
not of itself make them inferior in value. 
Other things being equal, the title of a bond 
signifies very little. The fifth mortgage bond 
o£ the old New York & Erie Railroad (now as- 
sumed by the Erie Railroad S3^stem) and of 
which there are outstanding $700,000, are not 
any the less valuable because they are secured 



36 ART OF WALL STREET INVESTING 

as a "fifth" mortgage only, but on the other 
hand they are decidedly high-grade in respect 
to security, as they are a lien (subject to four 
prior mortgages aggregating $13,500,000) on 
446 miles of the Erie main lines. As these main 
lines are easily worth ten times the amount 
of all five mortgages, it will be seen at a glance 
that they are all securities of a most desirable 
kind. 

A consolidated mortgage bond is generally 
created as a result of a reorganization, a read- 
justment of finances, or for the purpose of pro- 
viding new capital where a property is already 
mortgaged to some extent, and a second or 
third mortgage would not be well enough 
secured to warrant a ready sale. To cite an 
instance, let us take the First Consolidated 5% 
bonds of the Southern Railway Company. 
This Company was formed in 1894 as suc " 
cessor to a large number of other railroad 
corporations operating throughout the South. 
It was necessary to finance the new company 
with liberal capital, to spend a large amount 
of money on the properties, and in these and 
other ways to increase the earning power of 
the company. As the properties were already 
mortgaged in various ways for more than 
$60,000,000, it was not found practicable for 



BONDS AND WHAT THEY REPRESENT 37 

the company to issue an independent mort- 
gage. They therefore authorized a "consoli- 
dated" mortgage, one of the cardinal features 
being the authorization of a very large issue, 
of which a sufficient amount were held in 
reserve to retire the various prior divisional 
mortgages as they matured. This consolidated 
issue runs 100 years, and as the many divi- 
sional and prior bonds mature at different dates 
and some very quickly, it follows that the 
"consolidated" bonds grow in security and 
value as the old issues are cancelled. In this 
particular case every prior issue will be retired 
by 1938 and most of them much sooner, where- 
upon the consolidated issue will become a first 
mortgage. 

A general mortgage bond is of the same class 
as a consolidated mortgage. This is some- 
times called a "blanket" mortgage, and is fre- 
quently issued when there is but a single first 
mortgage on the property. It is sometimes 
partly secured by second mortgage and partly 
by first mortgage, but usually it is merely sub- 
sequent to two or more first and sometimes 
even consolidated or less well secured liens. 
When this is the case a sufficient amount is 
generally reserved to take care of the other 
bonds as they mature. In some cases the 



3 8 ART OF WALL STREET INVESTING 

prior liens, or portions of them, are exchanged 
for the "generals" on a mutually satisfactory 
basis. 

A prior lien bond is not necessarily a bond 
of prior security at all, except in a qualified 
sense. The term "prior lien" as applied to 
railroad bonds nowadays, connotes something 
entirely different from what would naturally 
be supposed. The Erie Railroad "prior lien" 
fours, for instance, are simply prior to the "gen- 
eral lien" fours, and both are part of an issue of 
a first consolidated mortgage which was author- 
ized at the time of the reorganization in 1895 
to provide new capital, take care of old mort- 
gages, etc. The prior lien issue, therefore, sim- 
ply has preference over the general lien por- 
tion of the same mortgage. The Northern 
Pacific, Baltimore and Ohio, and a number of 
other large railroad companies have adopted a 
similar device. 

A debenture bond is not a mortgage, but 
simply a promissory note, or promise to pay. 
It is usually issued in the same form as other 
bonds, sometimes carrying coupons and some- 
times appearing in registered form. While 
both principal and interest are an obligation of 
the company issuing the bond, yet in the case 
of a default the holder cannot foreclose as he 



BONDS AND WHAT THEY REPRESENT 39 

can in the case of a mortgage bond. In this 
respect the deoenture is in very much the 
same position as a cumulative preferred stock, 
with the important exception that the latter 
usually carries a voting power, while the 
former does not. But debenture bonds, like all 
the rest, get their investment status largely 
through the character of the corporation issu- 
ing them. Some debenture issues, like those 
on the Chicago & Northwestern system, are in 
such high standing (because of the vastness 
and general solidity of the company) as to be 
quoted at a very high premium, the fives sell- 
ing at over 115— while others are in the cate- 
gory of third-rate stocks. 

A collateral trust bond is an indirect mort- 
gage on a piece of property, made through the 
deposit with a trustee of other securities which 
are usually directly secured. Sometimes, how- 
ever, the collateral so deposited consists of 
both stocks and bonds, and in same cases, of 
stocks 'only. Like other kinds of bonds, there 
are "ail sorts and conditions" of collateral 
issues, some being secured by one collateral 
only and others being secured by a hetero- 
geneous variety of good, bad and indifferent 
stocks and bonds. In some cases bonds are 
secured partly by deposit of collateral and 



40 ART OF WALL STREET INVESTING 

partly by mortgage on some property. In such 
instances they are described as "mortgage- 
collateral trust bonds," etc. 

A convertible bond is an issue which carries 
a right or privilege for conversion into some 
other issue of bonds or stocks. There are 
many kinds of convertible bonds, and they 
carry convertible clauses for many and diverse 
reasons. Thus, United States Steel Corpora- 
tion second fives were convertible into pre- 
ferred stock at par; Erie Railroad four per 
cent, convertibles are convertible into common 
stock on the basis of $200 in stock for $100 in 
bonds before April 1, 1915; Baltimore & Ohio 
convertible debentures are convertible into 
common stock at par on any interest day, etc. 
Sometimes these clauses are inserted in mort- 
gages to give them a speculative value; in 
other cases to provide for the retirement of 
the debt by its conversion into stock. Usually 
the act of converting is optional with the 
holder. 

A joint bond is one issued or assumed by 
two or more corporations. Thus, the Great 
Northern-Northern Pacific joint collateral 
trust fours, secured by deposit of Chicago, Bur- 
lington & Quincy Railroad stock are the joint 
obligation of the two controlling companies. 



BONDS AND WHAT THEY REPRESENT 41 

There are not a great many issues of such 
joint-bonds, although there are many cases 
where independent bond issues are jointly 
guaranteed, either by two or more separate 
corporations. 

A guaranteed bond is one the payment of 
which is specifically "guaranteed" by endorse- 
ment or otherwise by another corporation. 
There are many guaranteed bond issues in the 
railroad field, carrying guarantees of various 
kinds. In some cases the interest only is guar- 
anteed; in others, both the principal and inter- 
est. Guarantees often come about as the result 
of a consolidation, lease or absorption of some 
kind, altho there are many cases in which 
bonds are guaranteed for other reasons. The 
Delaware, Lackawanna & Western Railway 
specifically guarantees the Morris & Essex 
refunding 3^2% bonds. But the Morris & 
Essex is a constituent part of the Delaware* 
Lackawanna & Western system, and the bonds 
would be equally as valuable without the guar- 
antee as they are with it. The guarantee, how- 
ever, makes them a direct obligation of the 
Delaware, Lackawanna & Western Railway, 
There are many guaranteed issues, which are, 
of course, materially improved by their guaran- 
tee, and which without it would not only be 



42 ART OF WALL STREET INVESTING 

unattractive, but would be entirely unsalable, 
for the reason that the property on which they 
are directly secured is not valuable enough in 
itself or has not the necessary earning power. 
It must not be assumed, however, that the 
mere formal guarantee gives the bond its 
value. This latter depends entirely upon the 
standing and financial strength of the guar- 
antor. Thus, a bond issue guaranteed by the 
New York Central system will have a far bet- 
ter standing than one guaranteed by a com- 
pany like the Denver & Southwestern, the 
standing of which has been of a more or less 
uncertain and speculative nature. 

Investors in guaranteed bonds should exam- 
ine their security very closely to ascertain 
whether the guarantee can be abrogated in 
any way, and whether it actually covers both 
principal and interest. If the guaranteeing 
company itself seems likely to ever repudiate 
the bond, its entire value will then, of course, 
revert back to the standing of the mortgage 
itself, and in any event, this latter should be 
investigated with care. The guarantee of a 
bond is usually embraced in the phraseology 
of the bond itself, or else is specifically stated 
by the actual endorsement of the guarantor. 



BONDS AND WHAT THEY REPRESENT 43 

An assumed bond is in some respects similar 
to a guaranteed bond, being an issue, the pay- 
ment of which, both principal and interest, is 
"assumed" by the controlling company. The 
effect is in some sense the same as a guarantee 
and the bond becomes, as a result, a direct 
obligation of the assuming corporation. There 
are many hundreds of "assumed" bonds dealt 
in in Wall Street, of every kind and description. 
Great care should be taken, however, in exam- 
ining a so-called assumed bond. Many large 
railroad corporations have acquired control of 
other properties without actually assuming 
their obligations. Frequently the acquiring 
company, for strategic or other reasons, volun- 
tarily takes care of these obligations, without 
being legally obligated to do so. But unless a 
bond issue has been definitely and formally 
assumed by the controlling company, its stand- 
ing as an investment must depend chiefly on 
the actual property itself and not on the stand- 
ing of the controlling corporation. Instances 
of assumed bonds are such as the Kentucky 
Central; Atlantic, Knoxville & Northern and 
the Evansville, Henderson & Nashville issues 
in the Louisville & Nashville system. The 
payment of both principal and interest of these 
issues has been made an obligation of the con- 



44 ART OF WALL STREET INVESTING 

trolling company. On the same system we 
find several mortgages of the Nashville, Chat- 
tanooga & St. Louis Railway which have not 
been "assumed" at all. These issues stand 
entirely on their own merits, and are an obliga- 
tion of the Nashville, Chattanooga & St. Louis 
Railway only, the latter being controlled 
through stock ownership, by the Louisville & 
Nashville Railroad. 

A divisional bond is usually an obligation of 
a large railroad which is secured on some spe- 
cific division of the property. On the Chicago, 
Milwaukee & St. Paul Railway all the bond 
issues, outside of the general mortgage, are 
divisional liens. Thus, the Iowa & Dakota 
Division 7s are a direct obligation, but secured 
by mortgage on the division extending from 
Algoma, Iowa, to Chamberlain, South Dakota, 
consisting of 355 miles. The Chicago & Lake 
Superior Division first 5s are a direct obliga- 
tion, but secured by direct mortgage on 75 
miles of road extending from Rockland, Illinois, 
to Portage City, Michigan. The cardinal dis- 
tinction between a divisional and an assumed 
bond is that the former is a direct obligation 
and is usually issued by the main corporation, 
while the latter is (or originally was) the obli- 
gation of a subsidiary corporation, the owner- 



BONDS AND WHAT THEY REPRESENT 45 
ship or control of the stock or property of 
which has been acquired, or is possessed by 
the main company. Assumed bonds are some- 
times spoken of as divisional issues, and in a 
broad sense they are, but the specific meaning 
cf the term is as explained above. 

An income bond is one on which the pay- 
ment of the interest is dependent on income. 
That is to say, while the principal is a mort- 
gage and legally must be taken care of at 
maturity, the interest rate is not a "fixed 
charge," and no foreclosure proceedings can 
be instituted in case the interest is not paid. 
The payment of the latter is entirely dependent 
on the earnings of the company, it being gen- 
erally agreed that if the interest is earned it 
shall be paid; otherwise, not. There are sev- 
eral classes of income bonds. Some are not 
a mortgage. These are usually known as "de- 
benture incomes." Others bear a cumulative 
clause which provides that interest when un- 
paid, shall accrue, and all accrued interest be 
paid or satisfied before the current interest is 
paid. These are known as cumulative income 
bonds. Still others are convertible into securi- 
ties of another class, such as preferred stock, 
and are known as convertible incomes. Others 
have preference over inferior issues and are 



46 ART OF WALL STREET INVESTING 

known as preference incomes. Thus on the 
Central of Georgia Railway there are issues of 
first, second and third incomes, all carrying the 
right to 5% interest per annum, when earned. 
In this instance 5% must be paid on the firsts 
before the seconds receive anything, and the 
seconds must of course receive their 5% before 
the thirds come in for any interest. If enough 
is earned to pay the full amount on the firsts, 
but not enough for the full amount on the 
seconds, then the latter usually receive what- 
ever amount of the divisible income is left. 
This may amount to 1% or 3%% or 4%, being 
dependent on what the road may be currently 
earning. 

It does not follow, however, that interest is 
always paid on income bonds, even when the 
property earns it. One frequently hears the 
remark, that such and such a company is 
"showing" the full interest on its incomes or 
the full dividend on its preferred shares. 
"Showing" is not necessarily paying, and pay- 
ments depend not merely on the earnings, but 
also on the judgment of the management as to 
whether it is wise to make the payments. Some 
managements are far more conservative in this 
respect than others, and the most far-seeing 
and cautious men, who handle the finances of 



BONDS AND WHAT THEY REPRESENT 47 

a large property, v/ill generally "go slow" in 
the matter of paying out money on incomes 
and dividends unless the company is earning a 
considerable surplus over the amount required 
for the payment, or has already accumulated a 
tangible surplus from earnings to fall back 
upon. 

A sinking-fund mortgage is one which car- 
ries a provision setting aside a portion of earn- 
ings year by year for the purpose of retiring 
the bonds at or before maturity. There are 
many kinds of sinking-fund clauses in bonds 
and they act in several different ways. The 
best known form is a provision requiring the 
company to deposit with the trustee period- 
ically a certain sum of money, sometimes a per- 
centage of the gross or net earnings, some- 
times a percentage of the outstanding issue, 
and sometimes simply a fixed sum of money 
each year; the trustee then either calling in by 
lot a sufficient number of the issue to exhaust 
the amount of money he has received, or, if 
more are offered at the callable price (this 
price is usually a premium figure, 102, 105, no, 
etc.), then buying the bonds in the open market 
at the lowest prices offered. The bonds so 
acquired are then cancelled and thus the issue 
is gradually reduced. Other forms of sinking- 



48 ART OF WALL STREET INVESTING 

funds are where the bonds so acquired by the 
trustee are "kept alive," the interest which is 
paid thereon being added to the fund and used 
for the purpose of buying still more bonds. 
Still other funds require that the bond issue 
itself be allowed to run until maturity and 
that the money set aside in the fund be in- 
vested in other securities, and thus the whole 
fund is held intact until the entire bond issue 
actually matures. 

There are a great many "sinking-fund" 
bonds in existence, but in the railroad invest- 
ment field, they are not as popular nowadays 
as in former times. The permanent investor 
does not like a sinking-fund which may result 
in disturbing his investment at any time, even 
if he does receive a little premium, and this is 
especially true of savings banks and large cor- 
porate investors like insurance companies, 
large estates, etc. Furthermore, in the case of 
a bond which is subject to call, an artificial 
value is created; it will not sell much above 
the callable price, for the reason that it is call- 
able at any time. On the other hand, if there 
is but little market for the bonds an artificial 
demand is created at the time of each sinking- 
fund purchase, and thus its attractions as an 
investment purchase are seriously interfered 



BONDS AND WHAT THEY REPRESENT 49 

with. In the matter of municipal securities, 
however, the sinking-fund is far more logical 
and useful, and particularly is it necessary in 
bonds which are issued for the construction of 
public utilities such as water, electric light and 
gas plants, which (where owned by municipal- 
ities) are operated at approximate cost and are 
not supposed to set aside surplus earnings in 
other ways to cover depreciation, expansions 
and improvements. This is also true of the 
more speculative classes of bonds, such as 
those on public service corporations in private 
hands, industrial enterprises, etc. Such can- 
not, as a rule, have too much safe-guarding of 
this nature. Railway industries of all kinds 
which have not had the opportunity of demon- 
strating their permanency or soundness over 
long periods of time should always carry sink- 
ing-funds in their bond issues. This is particu- 
larly applicable to industrial enterprises, the 
property of which constantly tends to depre- 
ciate. The great United States Steel Corpora- 
tion carries many kinds of sinking-funds, 
aggregating in total amount nearly $35,000,000 
per annum, which at the present time is equal 
to more than 20% of the annual net income of 
all the plants. Bonds on coal mines and other 
mining properties also usually carry sinking- 



5 o ART OF WALL STREET INVESTING 

funds. In the case of the former the proviso 
usually is that a certain amount (often 2 or 
3 cents) be set aside with every ton of coal 
mined, the accumulations being used in the 
usual ways for the retirement periodically of 
the issue. 

An extended bond is an issue which has 
matured and by agreement with the owners 
has been extended for a further period, instead 
of a new issue being created to take its place. 
Often bonds are extended for a few years only, 
but sometimes the extension reaches on over 
several decades. Usually, in the case of rail- 
road issues, the rate of interest is reduced at 
the time of the extension and sometimes new 
bonds of the same mortgage, but with sheets 
of coupons at reduced rates, are exchanged for 
the old ones. There have been instances 
where the old bonds have been retained and 
stamped with the "extension clause," and new 
sheets of coupons supplied separately. 

There are several issues of extended bonds 
now running as divisional liens on the Erie 
Railroad system. These are the New York & 
Erie first, second, third, fourth and fifth mort- 
gages. Originally issued in the '40s and '50s 
at 7%, they all matured in the '70s and '8os, 
and have been extended for forty to fifty years 



BONDS AND WHAT THEY REPRESENT 51 

more at 4, 4^ and 5%. When they finally 
mature again they will this time be retired, 
and bonds of the Erie Railroad general lien 
issue, now held in reserve, will take their 
places. 

An underlying bond is a general term 
describing any issue which precedes or is prior 
in mortgage security to some subsequent issue. 
When a bond is spoken of as underlying, it is 
generally so referred to in connection with 
some general or junior issue, which may or 
may not provide for retiring this issue at 
maturity. Thus any bond issue is "under- 
lying" which has a junior security following it. 
Hence, a bond need not necessarily be a first 
mortgage to be described as "underlying." It 
may itself be subject to a further mortgage 
or mortgages which underlie it. On many 
railroad systems, and indeed in other corpora- 
tions there are frequently several "layers" of 
underlying issues, and on portions of the Erie 
and of the Reading systems, there are as many 
as ten mortgages secured, "underlying," or, if 
you wish to reverse the viewpoint, "overlying" 
one another. 

A refunding mortgage bond is an isssue 
especially created for taking care of maturing 
issues, supplying additional capital, etc., and 



52 ART OF WALL STREET INVESTING 

for reducing fixed charges. The modern re- 
funding bond on steam railroads is usually 
an issue running one hundred years, bearing 
a comparatively low rate of interest, and gen- 
erally secured by a "blanket" mortgage on "all 
the property now owned or hereafter acquired," 
subject, of course, to the prior mortgages which 
are to be retired as they fall due. Often, a 
very large issue is authorized, in order that 
funds may be available for future acquisitions. 
One of the first large refunding issues was that 
of the New York Central 3%fo refunding 
mortgage issued in June, 1897. The author- 
ized issue was $100,000,000, of which $70,- 
397,333 were originally reserved to retire cer- 
tain prior liens, with $14,622,667 for premiums 
on the bonds. The remaining $15,000,000 were 
to be issued for new construction or property, 
after Dec. 31, 1903, at a rate not exceeding 
$1,000,000 per annum. 

In authorizing these bonds the maturity of 
several underlying liens was anticipated by a 
few years. It so happened that all the main- 
line mortgages on the New York Central sys- 
tem matured between 1897 and 1905, and in 
authorizing the new 3%% mortgage it was 
made a part of the plan to allow holders to 
exchange their old bonds at once, on an equit- 



BONDS AND WHAT THEY REPRESENT 53 

able basis, and without waiting for the dates of 
maturity. This exchange plan was made 
optional with the old bondholders, but a large 
proportion of them took advantage of it. To- 
day all the prior liens have been retired and 
nearly $85,000,000 of the three and one-half 
per cents are today outstanding. It will be 
observed that they are now an actual first lien 
on the main lines of the system, and their re- 
funding features have ceased to be a factor. 
There are today a large number of refunding 
issues, and because of their improving posi- 
tion, the length of time they run, and so forth, 
they are generally more popular with perma- 
nent investors than the prior issues which 
usually underlie them. 

A participating bond is a modern term 
describing an issue which is entitled to partici- 
pate in income or profits, under certain condi- 
tions, beyond its fixed rate of interest. The 
most notable instance of a participating bond 
were the Oregon Short Line Railroad partici- 
pating fours, issued in 1902, but called for pay- 
ment and cancelled on February 1, 1905. These 
bonds were issued to finance the purchase by 
the Union Pacific interests of Northern Securi- 
ties Company stock, and the latter was depos- 
ited as collateral with the trustee. The mort- 



54 ART OF V/ALL STREET INVESTING 

gage required that in addition to receiving 4% 
interest, the bonds were to participate in any 
dividends over 4% that the Northern Securi- 
ties Company stock might pay. Thus, when 
the Northern Securities Company dividend 
rate was increased to 5%, these bonds re- 
ceived a dividend of 1% in addition to their 
regular interest, and of course shared, to an 
extent, in the speculative value thus engen- 
dered by an additional division of profits. The 
Northern Securities merger being afterward 
set aside, these participating bonds were large- 
ly converted into a new refunding issue of 
fours, guaranteed by the Union Pacific Rail- 
road, and the balance were called and paid off 
at the redemption price of one hundred and 
five. 

An equipment bond is an issue created to 
acquire equipment, and is secured directly 
upon locomotives, cars, and so forth. It fre- 
quently happens that a railroad finds it neces- 
sary to increase its equipment rapidly in order 
to handle a growing business in the most eco- 
nomical way. In most cases, large purchases 
of this kind involve the borrowing of money, 
as railroads do not always have funds available 
for such purposes. In view of this situation, 
"equipment trusts" or equipment bonds have 



BONDS AND WHAT THEY REPRESENT 55 

been invented. These usually run for short 
periods only, generally being paid off in instal- 
ments or serially, ranging over several years. 
In some cases the payment of the principal of 
these equipment mortgages is done out of 
current earnings; in other cases out of the 
proceeds of other bond issues. Often there are 
several issues of equipment obligations on 
large properties, maturing at different periods 
and secured on different groups of locomotives 
and cars. Equipment bonds usually bear the 
current rates of interest which may be prevail- 
ing for a good security at the time they are is- 
sued. They are nearly always a well-protected 
obligation, as they cover tangible property, 
the value of which is easily determined. 

In addition to the foregoing, there are vari- 
ous other designations sometimes given to 
bond issues, such as land grant bonds, trust 
mortgage bonds, currency bonds, and so forth, 
which have either been covered in the more 
general terms described in the foregoing pages, 
or else carry names which are sufficient de- 
scriptions in themselves. Thus, currency bonds 
are issues which bear no "gold clause," but are 
payable, principal and interest, in the currency 
of the country, whatever that may happen to 
be. During the days of the free-silver agita- 



56 ART OF WALL STREET INVESTING 

tion, and for nearly a decade before, nearly all 
railroads and financiers inserted the "gold 
clause" in bonds, which was simply a state- 
ment printed in full on each bond and coupon 
to the effect that the issue would be paid, not 
in "money" or "currency," but in gold. Thus, 
the gold clause came to be a feature of the ut- 
most importance, for it was almost universally 
held (and especially in Wall Street) that free 
coinage of silver would mean an appreciation 
of one hundred per cent, in the value of gold 
as measured by the money standard. Whether 
this would have occurred or not is still a 
mooted question among the students of the 
currency problem, but in reality, if the rail- 
roads had, under such a condition, been obliged 
to pay in gold, it will be seen that they would 
all have defaulted on both principal and inter- 
est. Therefor the "gold clause" was largely 
sentimental after all. Like the guarantee 
clause of a bond whose guarantor had not the 
proper resources to take care of its obligations 
in case the demand came upon him, so the gold 
clause, while sentimentally beneficial to sellers 
of bonds, could not have been of much prac- 
tical usefulness if the actual conditions had 
come about which it was created to circum- 
vent. But, as in every other walk of life, un- 



BONDS AND WHAT THEY REPRESENT 57 

sound premises are often cherished and erected 
into superstitions in Wall Street, and there are 
many eminent men there to this day, who will 
still hotly contest that it is just as necessary as 
ever to put the "gold clause" in a bond, to 
avoid all danger of depreciation; in spite of 
the fact that gold is now tending to depreciate 
and holding down the prices of bonds as a re- 
sult. 

The chief point to be emphasized in the 
chapter on Bonds and What They Represent 
is that the mere title of an issue may mean 
nothing from the standpoint of safety and 
value. These descriptive details refer in no 
way to the value of a specific bond, but simply 
to the anatomy of the different issues. Inva- 
riably the rule should be, when selecting a 
bond for investment, whether it is a direct 
mortgage, a consolidated or a general issue, a 
collateral trust or an income, a debenture or a 
refunding bond, to learn something of the 
property which it represents. If it is a railroad, 
what its capital is and what its earnings are, 
who its managers or controlling interests are; 
its alliances and rivalries; its territory and its 
strategic position; its past history and future 
prospects. These are general fundamental 
matters of the first importance, and it is 
through neglect of such knowledge that a 
large proportion of investors are mislead or go 



58 ART OF WALL STREET INVESTING 

astray. As an example, let me cite the case of 
the Rock Island Company. This is a very 
large corporation, with capital running into 
the hundreds of millions and controlling in the 
neighborhood of 18,000 miles of railway lines. 
Its securities are about as heterogeneous as 
they could possibly be made, even if they had 
been created and brought together by design 
rather than by accident. In all there are up- 
wards of seventy bond issues on the system, 
including nearly every conceivable kind of 
mortgage, good, doubtful and indifferent. There 
are first mortgages of very inferior worth and 
bonds not mortgages at all, and yet of high 
standing. How easy it is, therefor, to err in 
passing upon bonds in this system, unless a 
good deal of general fundamental knowledge 
is first acquired. Thus one might naturally as- 
sume that the four per cent, collateral bonds of 
this company, due in 2002, were a sounder in- 
vestment than the refunding fours of 1934, or 
that the gold fours of 1908-18 were better 
secured than the general mortgage fours of 
1988. A little expert knowledge in these mat- 
ters will set the judgment right, however; and 
this fundamental knowledge once gained and 
uniformly employed in the judging of bonds 
will always prove of infinite value to the pros- 
pective investor in Wall Street. 



Ill 

Stocks and What they Are 

^TpHE cardinal distinction between bonds 
**- and stocks is clear, simple and concisely 
explained. Bonds represent or are secured by 
liens on property. Stocks are the property. 
Sometimes people fail to realize that stocks are 
the property itself and persist in assuming that 
they are merely a sort of legal attachment 
to it. But this is entirely erroneous. When 
one owns stock in the United States Steel Cor- 
poration, he is actually a part owner of those 
great properties, but if he owns a bond of this 
corporation he merely shares with others a 
mortgage which is secured on the property. 
Hence, if a stockholder, he gains or loses when 
the property appreciates or depreciates in earn- 
ing power or value; but if a bond holder in a 
well-secured mortgage, he neither gains nor 
loses as the earnings and business rises or falls, 
but his asset remains practically stationary in 
vahie. Stocks are also affected by various 

59 



6o ART OF WALL STREET INVESTING 

other influences which in no way affect bonds. 
Thus, the stockholder, being a joint owner with 
others of the actual property, therefor has, at 
least theoretically, a voice in its management. 
This "voice" is represented in his voting 
power, each stockholder having the right to 
cast one vote for each share of stock he owns, 
at annual meetings called together for the elec- 
tion of officers and directors, or at special meet- 
ings called for various other purposes, such as 
authorizing mortgages, new issues of stock, 
etc., etc. Usually preferred and common 
stocks have equal voting power, but there are 
exceptions where this is not true, and where the 
preferred shares have two or more votes to the 
common stockholders one. On the other hand 
cases exist where the preferred stockholders 
waive their voting power in consideration of 
receiving regularly a specified rate of divi- 
dends, and only re-assume their right in case 
their income is discontinued. This same pro- 
vision has sometimes been made in bond is- 
sues, usually income or debenture bonds. 

A common stock is an issue which bears the 
designation "common" to distinguish it from a 
"preferred" issue of the same corporation. If 
no preferred issue exists, the qualifying word 
^common" is not necessary and is not usually 



STOCKS AND WHAT THEY ARE 61 

employed. In such cases the issue is simply re- 
ferred to as such and such a stock. Many of 
the railroads and industrials which are dealt in 
in Wall Street have both common and pre- 
ferred issues, however. Roads like the New 
York Central, Pennsylvania, etc., are the ex- 
ception rather than the rule. Of one hundred 
and thirty-four railroads and industrials whose 
issues are "active" on the Stock Exchange and 
are daily quoted in papers like the New York 
Evening Post, eighty-eight have both pre- 
ferred and common stocks outstanding, while 
only forty-six have but one class of stock. 

Common stock is generally entitled to divi- 
dends from earnings only after all prior 
charges and preferred stock dividends have 
been satisfied. In other words, it is the last 
security to be taken care of in the dividing of 
profits. Hence, the common stock is more 
often a speculative or semi-speculative security 
than preferred stocks or bonds. In many cases 
common stocks have never received dividends 
and probably never will. Their chief value, 
under such conditions, is measured partly by 
their voting power and partly by the fluctuat- 
ing value of the equity in the property of 
which they are shares. Thus, in the case of 
the common stock of the Wabash Railroad, 



6? ART OF WALL STREET INVESTING 

the present value or cost, aside from tem- 
porary speculative manipulation, is measured 
almost entirely by the voting-power, as there 
is no immediate prospect of dividend payments 
of any kind, and the equity back of it is so 
nebulous and uncertain that it cannot be sanely 
measured at all. This is also somewhat true 
of stocks like United States Steel common and 
Republic Iron & Steel common. While these 
stocks may temporarily, in an income account, 
show an apparent earning power, yet when we 
examine their incomes over a reasonable period 
of time, it is usually found that the value is 
almost purely speculative, and that while in 
prosperous times they may earn a large sur- 
plus, yet in periods of depression even the divi- 
dends on their preferred stocks are placed in 
jeopardy. 

While common stocks are usually entitled 
to all divisible earnings after payment of inter- 
est charges, sinking funds and preferred divi- 
dends, yet there are exceptions to this rule. 
In the case of many railroads, the preferred 
issues share certain earnings after the common 
has received a given rate. For instance, the 
preferred stock of the Chicago, Milwaukee & 
St. Paul Railway has a prior right to 7%; the 
common then receives 7%, after which each 



STOCKS AND WHAT THEY ARE 63 

class shares pro rata in any further division 
of profits. There are other instances of a gen- 
erally similar nature, in some cases the com- 
mon receiving only one-half of the divisible 
surplus over the preferred dividends, the other 
half going to the preferred shares themselves 
as additional dividends. In this case a given 
preferred stock might first receive 6%, then 
both common and preferred 1% each or more, 
as the case might be. Consequently, when the 
common is being paid 6%, the preferred will 
be receiving 12% per annum. 

A preferred stock is a portion of a corpora- 
tion's capital issue which takes precedence over 
the remainder, either as to assets or dividends, 
or both. There are many different characteris- 
tics in preferred stock issues ; some have cumu- 
lative and some non-cumulative dividend 
clauses; some have prior security as to assets 
and seme not ; some have exclusive power over 
the issuing of new mortgages or increases of 
stock issues and some have not. The Atchison, 
Topeka & Santa Fe Railway requires that its 
preferred stock receive 5% non-cumulative 
dividends; that it have preference over the 
common shares as to assets (up to its face- 
value), and that no new mortgages or addi- 
tional preferred stock be issued without the 



64 ART OF WALL STREET INVESTING 

consent of a majority of the holders. By non- 
cumulative is meant that in case the dividend 
is not paid in a given year, it may be "skipped" 
entirely, "wiped off the slate," so to speak, and 
in future only the regular rate need be cur- 
rently paid before beginning payments on the 
common stock. It is, therefor, obvious that 
the non-cumulative clause in a preferred stock 
is of advantage to the common holder, and 
may become a decided disadvantage to the 
preferred holder. 

While most railroad preferred stocks are 
non-cumulative as to dividends, this is not so 
sweepingly true of industrials. Of eighty- 
four active industrial preferred stocks de- 
scribed in Moody's Manual for 1905, fifty-eight 
carry cumulative clauses and twenty-six non- 
cumulative, the proportion of those with cumu- 
lative clauses being 66% to the whole. In the 
case of a cumulative stock all back dividends 
are regarded as an actual liability, and must be 
paid before those currently required are satis- 
fied. The result of this is that when the corpo- 
ration cannot pay the full dividend or any of it, 
the amount unpaid accumulates as a direct obli- 
gation. Many industrial preferred stocks are 
in arrears on their dividends. Among such at 
the present time may be mentioned American 



STOCKS AND WHAT THEY ARE 65 

Can Company preferred (a 7% stock), about 
19% in arrears; American Hide and Leather 
preferred (also a 7% stock), 37% in arrears; 
American Writing Paper Company preferred 
(7%), 38% in arrears; International Silver 
preferred, about 20%; United States Cotton 
Duck Corporation, about 17%. These arrears 
will all have to be taken care of in some way 
before the common stocks which follow them 
can claim any share of the profits. In many 
cases, arrears of this kind are wiped out by 
compromise or other capital readjustment. 
The latter expedient has been adopted in sev- 
eral cases by solvent, money-making corpora- 
tions, which have found, through an extended 
experience, that the conditions of their busi- 
ness hardly warrant the heavy dividend 
charges which the original capitalization pro- 
posed. As, under such circumstances it would 
be practically futile to continue to allow the 
high dividend charges to accumulate indefi- 
nitely, a plan is usually devised to take care 
of back dividends by a further stock issue or 
bond issue, and then the cumulative rate is 
reduced to a figure which the business can 
reasonably stand. This idea of readjustment is 
illustrated in a notable manner in the case of 
the United States Leather Company. This 



65 ART OF WALL STREET INVESTING 

company was actually reorganized and its capi- 
talization entirely transformed for the purpose 
of financing the accumulations of over 40% of 
back preferred dividends and to get rid of the 
high 8% dividend charge for the future. 

Stocks are not nearly so heterogeneous as 
are bond issues. Besides the ordinary stock 
and the two classes of common and preferred 
there are comparatively few issues which do 
not come under these headings. Among these 
few may be mentioned debenture stock, a 
special kind of issue popular on some of the 
Canadian roads, and also on the Chicago Great 
Western Railway. A debenture stock is gen- 
erally regarded as being in the same category 
as a high-grade preferred issue, with usually 
some kind of special feature to add to its secur- 
ity. As a matter of fact, however, its position 
and the earnings of the company are the proper 
measures of its value and not its "debenture" 
feature. The Chicago Great Western Railway 
debentures are "guaranteed" to pay 4% inter- 
est, the guarantor being the road itself. But 
this guarantee is not a more binding obligation 
than would be a cumulative clause in a pre- 
ferred stock, and if the latter had preference 
as to its assets, its legal position would be in 
every way as secure. 



STOCKS AND WHAT THEY ARE 67 

In analyzing or judging the value of stocks 
in general, quite different methods should be 
employed in the various classes of corporate 
issues. Stocks of railroads, industrials, trac- 
tions, mines, and so forth, while all of the same 
species, are each of a different genus, and they 
are all the result of different evolutionary pro- 
cesses. Thus, most of the railroad stocks oc- 
cupy a much higher plane as investments than 
do the industrials, and it is generally felt 
that they are safer and less speculative. 
This is due to several causes. In the case 
of the older issues, the railroad properties 
of which they are part have greatly appreci- 
ated in value and earning power; their territo- 
ries have grown vastly in population, and their 
rights of way, terminals and other advantages 
(acquired many years ago) , have all become of 
enormous value. While they may have origi- 
nally represented little beside speculation, and 
their properties may have been mortgaged "up 
to the hilt/' so to speak, yet, like the owner of 
a piece of land in the heart of a growing city, 
they have enjoyed the felicity of seeing an 
enormous increment added to the value of their 
property over the period which may have 
elapsed since the early speculative days. It 
was not so many years since the Delaware^ 



68 ART OF WALL STREET INVESTING 

Lackawanna & Western Railway was re- 
garded as a property which, while not very 
heavily bonded, would probably never be able 
to earn or pay more than a 7% dividend on its 
stock issue. It could never become a fast 
freight line, nor a through passenger line like 
the Pennsylvania or the New York Central. 
Indeed, its through connections were not 
thought to be as good as those of the Erie, 
and while it was in every way sounder finan- 
cially than the latter, yet its operating methods 
were regarded as more or less antiquated and 
it bore the nickname of "delay, linger and 
wait." Certainly its future could not equal, 
it was thought, that of the Central Railroad of 
New Jersey. And yet, because of the vast 
growth of population along its line, the great 
development and concentration of the anthra- 
cite coal properties through which it runs, 
combined with various traffic alliances, the 
value of the property has appreciated to a point 
far beyond the wildest visions of those of ten 
or fifteen years ago. Today the stock of the 
company is selling at nearly five times its par 
value, it is paying 10% dividends and earning 
over 50%, and all this without any material 
addition of mileage or of acquired properties. 
The same tale can be told of nearly all of the 



STOCKS AND WHAT THEY ARE 69 

older and established lines, though not always 
to the same degree as in the case of the Dela- 
ware, Lackawanna & Western Railway* 
There are many newer properties, it is true, 
where the stocks, and particularly the "com- 
mon" issues are far more speculative and rep- 
resent much less tangible property. Thus, 
there has been a certain amount of modern 
financing in railroad consolidations, as witness 
the Rock Island system, the new common 
stock of which represents practically no tangi- 
ble property today, and sells at purely specu- 
lative prices, even the usual voting power hav- 
ing practically been withheld from it. 

Therefor, in judging railroad stocks, these 
special conditions should be taken into consid- 
eration as being the most vital of factors. The 
railroads all possess special privileges in their 
rights of way and terminals, which in a coun- 
try like ours are of constantly growing value 
because of the swelling population and steady 
concentration of wealth. It goes without say- 
ing that this general tendency will probably 
be continued for at least several generations 
more. Hence, even the least secured railroad 
stock, unless there are some special disadvan- 
tageous features connected with it, will bear 
examination in this light, for in the course of 



70 ART OF WALL STREET INVESTING 

time, the income will automatically increase 
with the growth of population and wealth and 
the stock be benefited thereby. 

This principle, however, cannot be so gener- 
ally applied to industrial stocks. These issues 
are purely a creation of modern times, as are 
the great corporations and consolidations 
which have brought them into being. As is 
well known, nearly all the newer industrial 
corporations are greatly over-capitalized, and 
as a result, the common stocks especially are 
of a very speculative nature, do not represent 
anything except voting power and future 
hopes, and generally sell far below their face 
values. This condition of things has been 
brought about by certain apparent necessities 
in financing, and also because the formation of 
these great corporations has been of the nature 
of pure innovation, and the outcome in mat- 
ters of economy, in methods, in new advan- 
tages derived through consolidation and other 
benefits assumed to be gained by large scale 
management and production, could not be defi- 
nitely known or judged until tested over a 
reasonably long period of time. Therefor the 
financing of most of these companies has been 
on a semi-speculative basis, and in order to 
carry through consolidations and get the 



STOCKS AND WHAT THEY ARE 71 

necessary financial backing, it has been found 
necessary to pay very liberal commissions to 
underwriting syndicates and promoters as well 
as bankers and others to have the consolida- 
tions carried through at all. 

The method employed has usually involved 
the issue of a preferred stock to an amount 
representing the appraised value of the con- 
solidated plants. As these values have often 
been actually made higher than the real worth 
of the properties, there has sometimes resulted 
a good deal of inflation even in the preferred 
issue. In addition, a further amount of the pre- 
ferred stock is then sold for the purpose of 
raising working capital. When this is not 
done a bond issue of some kind is usually ar- 
ranged for this special purpose. A very large 
issue of common stock is next created and an 
underwriting syndicate undertakes to pay the 
face value for all of the preferred shares 
not otherwise used in exchange for plants, 
property, and so forth, receiving as its com- 
mission for doing this 100% in some cases, and 
in others as much as 200%, in common stock* 
Some common stock is also issued for the pro* 
moter, perhaps a block is issued to go to thd 
former owners of the plants and to other inter- 
ested parties and for other special purposes. 



72 ART OF WALL STREET INVESTING 

The syndicate then, usually through bankers, 
undertakes to dispose of the underwritten pre- 
ferred stock to investors by giving, as a bonus, 
50% to 100% in common stock. The effect of 
all this "watering" of the properties is that the 
preferred stock is immediately quoted far be- 
low its face value and the common sells at a 
very low price; the fact being that the true 
value of the properties may be fairly repre- 
sented by 80% of the face value of the pre- 
ferred and 20% of the face value of the com- 
mon. Even if the preferred stock pays the full 
dividend promised (usually 6% or 7%) it will 
not for a long time appreciate to its par value, 
and the common of course remains at a very 
low figure until the earnings actually begin to 
accumulate to an amount where some kind of 
definite steady dividend is assured on the com- 
mon. 

In the matter of appreciation through un- 
earned increment, the industrial corporations 
as a class are not in nearly so fortunate a posi- 
tion as the railroads. In exceptional cases, 
they have advantages of a high order, which 
may or may not appreciate; in very few cases 
have they the certain and fundamental privi- 
lege in such large percentage as the railroads. 
Special legislation may benefit an industrial or 



STOCKS AND WHAT THEY ARE 73 

it may injure it; tariffs, patents, trade-marks, 
and so on, will frequently benefit an industrial 
property, but these are in a sense fixed or sta- 
tionary advantages, and do not necessarily ap- 
preciate in value as do the railroads. The lat- 
ter have the fundamental advantage of at all 
times having their feet directly upon the 
ground. It is true, of course, that the trusts 
or industrials do finally rest on benefits similar 
to those of the railroads, which tend to appre- 
ciate in the course of time in standing and 
stability. Thus, coal mining properties, partic- 
ularly in the limited anthracite field, are in this 
category; so are the great realty and construc- 
tion companies; also the steel and iron manu- 
facturing corporations who own valuable ore 
and coal deposits, and the oil refineries who 
also own the original sources of supply. But 
even these advantages are in a sense uniform 
and certainly their tendencies to appreciate in 
value are not to be classed with the more direct 
tendency shown in the steam railroad proper- 
ties. Of course in the final analysis, the bene- 
fits accruing to transportation companies, also 
accrue to the benefits of the general class of 
industrials and will continue so to a greater 
degree as time goes on, but not for many gen- 
erations to the point sometimes demanded by 



74 ART OF WALL STREET INVESTING 

the largely inflated issue of common and pre- 
ferred industrial stocks. 

Industrial stocks are either cumulative or 
non-cumulative and usually carry dividends of 
either 6% or 7%. The cumulative clauses usu- 
ally work on the principle already described 
a few pages back. The dividends are paid 
quarterly in most cases, but sometimes semi- 
annually. In no cases are dividends supposed 
to be paid unless actually earned, although 
there are many instances where a corporation 
pays a dividend out of accumulated surplus 
even if not currently earned. It will be readily 
realized, however, that this kind of policy, if 
followed to any material extent, cannot be 
regarded as conservative. No matter how 
large an accumulated surplus may be, if a 
growing corporation is currently earning for 
any length of time only 4% on its capital, it is 
not sound management to pay out 5%. Where 
a company begins to do this it should be 
closely watched. 



IV 

Analyzing Railroad Securities 

T3 ROPER judging of the values of railroad 
-*- securities involves, first of all, the ability 
to analyze railroad reports. The report of a 
railroad need not and should not necessarily 
be left to the study of the expert for analysis, 
as each investor may, with a reasonable 
amount of careful training, learn to decipher 
the statements of the report for himself. While 
reports are, to the uninitiated, dry and com- 
plex affairs, being made up of a number of 
statistical statements and other groups of fig- 
ures which seem largely meaningless, yet, as a 
matter of fact, the salient points in even the 
most complex and voluminous reports can usu- 
ally be deciphered at short notice, if one is but 
familiar with the few fundamental rules which 
will be explained in the following pages. 

As Mr. Thomas F. Woodlock pointed out in 
his little book, "The Anatomy of a Railroad 
Report," written over ten years ago, "the 
object of a railroad report should be to convey 

75 



76 ART OF WALL STREET INVESTING 

rate idea of the position of the prop- 
erty, both physical and financial, so that one 

may know pretty well all the principal circum- 
stances affecting its welfare. 5 ' 

In examining the railroad properties gener- 
ally, before we consider the securities specific- 
ally, we have three distinct divisions of the 
properties to anatyze. First, the physical char- 
acteristics; second, the earning power, and 
third, the financial characteristics. The first 
and fundamental feature of a railroad prop- 
erty is, of course, the physical. This includes 
location and length of road; character of 
territory covered and contiguous to the same; 
terminal facilities and connections; volume 
and character of business carried on; volume 
and description of equipment employed. 

The second feature to be examined is the 
income or earning power of the property, and 
this involves an examination of the company's 
revenue account, which should cover the fol- 
lowing points: Gross earnings, operating ex- 
penses, net earnings, income from other 
sources, fixed charges, dividends and surplus, 

The financial characteristics should then be 
examined. This involves an analysis of the 
balance sheet, so called, which is always made 
up of the following four divisions : 



ANALYZING RAILROAD SECURITIES 77 

Capital assets ; current assets ; capital liabili- 
ties ; current liabilities. 

With the true and proper facts at hand cov- 
ering the above features, a railroad report can 
be, after a little experience, analyzed quite sim- 
ply, and the value of a given security then 
judged very accurately in connection with it. 
Nowadays nearly all the railroads of any 
standing or importance whatever, give prac- 
tically all of the foregoing facts in their reports 
in one way or another, and some of them give 
a great deal more. Where the facts are not 
given, however, it will usually be found that 
they can be obtained in the reports of the 
Interstate Commerce Commission, although 
the statements of the latter are not given to 
the public as promptly as one might wish. 

1. Physical Characteristics. An examina- 
tion of this branch of the subject must begin 
with an examination of the location and length 
of the road. Every railroad report contains a 
statement of miles of road, first, second, third 
and fourth tracks and sidings, and also the 
mileage operated, controlled and leased or in 
any other way connected with the company, 
A complete report should also show in detail, 
or at least by the aid of a map, the exact loca- 
tion of each division. In the case of the Nor* 



78 ART OF WALL STREET INVESTING 

folk & Western Railway this is done very 
satisfactorily, thus showing the character of 
territory through which the road runs. A 
satisfactory map will also show the connec- 
tions with other lines, in most cases an item of 
very great value and importance. These facts, 
considered in connection with the character of 
the contiguous and covered territory, are of 
the first importance. It is a factor of great 
value to know whether the territory and ter- 
minal surroundings are such as to be likely to 
appreciate in value through general influx of 
population, development of manufacturing and 
of agriculture, or the reverse. Valuable char- 
acteristics of the Norfolk & Western system 
are its terminals and connections both east 
and west. It runs partially through a sparse 
territory but is one of the soft coal carrying 
roads, and its branches into the soft coal fields 
of Virginia and West Virginia are of the first 
importance, and are likely to grow in value as 
the years go by, largely because of the char- 
acteristic of exclusiveness. The Reading Com- 
pany's system also enjoys similar characteris- 
tics. Its many lines, while enjoying important 
connection and terminal advantages, would 
not be in any sense so valuable were it not 
for its dominating influence in the hard 



ANALYZING RAILROAD SECURITIES 79 

coal fields of Pennsylvania. In controlling the 
coal output it has a practically exclusive ad- 
vantage which goes a long way in adding 
value to its securities. Without this special 
characteristic it is not at all likely that the 
Reading Railroad lines would be on anything 
like the same secure basis that they are today. 
If the coal fields were accessible to actually 
competing lines, it is very clear that the Read- 
ing Railway earnings would be seriously and 
permanently affected. 

In the matter of terminals and connections, 
the Reading Company is on a somewhat differ- 
ent basis than the Norfolk & Western. The 
latter extends from Columbus, Ohio, to Nor- 
folk, Virginia, and the terminals are actually 
owned by the company. Up to recent years 
the Reading system had no entrance of its own 
into New York City, but since 1899 it has 
controlled the New Jersey Central lines with 
the latter's important and rapidly appreciating 
New York terminals. Because of the latter, 
joined with its Philadelphia terminals and its 
various alliances with other lines, the Reading 
properties have shown enormous appreciation 
in value and earning power during the past few 
years; and it is clearly evident that the 
tendency will continue as long as the condi- 



Bo ART OF WALL STREET INVESTING 

tions of control of territory and terminals re- 
main the same. There is practically no factor 
so important in a railroad property as exclu- 
sive rights of way or terminal facilities, or the 
exclusive control through location, and so 
forth, of a necessary commodity, such as is 
anthracite coal in the Eastern states of our 
country. 

It will thus be seen that the location and 
character of territory of the Norfolk & West- 
ern and Reading systems is a factor of great 
importance, and should be analyzed before 
anything else. The length of line and char- 
acter of construction should then be examined, 
as may very easily be done with the aid of the 
company reports. 

The volume and character of business of 
course comes under the head of physical char- 
acteristics, and should be jointly considered in 
the examination of the location of the roads. As 
is well known, the carriage of freight is the 
important item on every railroad, and the best 
railroads state in detail the character of ton- 
nage, with the total amount and percentage 
of each class of freight. The importance of 
these facts is most obvious. Where a railroad 
is dependent for its income largely on some 
special productive manufacture, such as grain, 



ANALYZING RAILROAD SECURITIES 81 

toal, iron or other special commodities, it is 
naturally subject to any special condition 
which may from time to time affect that class 
of tonnage. Thus, in the case of the coal strike 
the Reading Company's earnings were very 
seriously affected ; in the case of a crop failure, 
such roads as the Northern Pacific, Chicago, 
Burlington & Quincy or Rock Island would 
feel the effect to a marked degree. The char- 
acter of the tonnage, therefore, should be ana- 
lyzed in connection with its stability, durability 
and possible fluctuation. 

In examining the volume of tonnage, the 
mere gross amounts of freight carried may 
mean very little. Traffic density should be 
ascertained, for both freight and passengers. 
Most railroad reports give the number of tons 
carried one mile and the number of passengers 
carried one mile, with the average rate received 
per ton and per passenger. By dividing this 
ton mileage by the whole number of miles 
operated, we get the freight density, which is 
the number of tons carried one mile per mile 
of road. By the same method we ascertain the 
number ^of passengers carried one mile per 
mile of road, this being the passenger density. 
Considered together, these two items make 
what is known as the traffic density, and their 



82 ART OF WALL STREET INVESTING 

chief importance lies in the fact that they show 
the volume of business done by the road very 
closely, and also enable one to make accurate 
comparison with the volume and character of 
business done by other roads. If the proper 
figures are furnished it is a comparatively sim- 
ple matter to sub-divide the freight density of 
the various important classes of traffic. 

Train mileage figures are also important to 
know. By them is shown the volume of 
freight and number of passengers carried on an 
average in each train. Some reports show the 
average tons and passengers per ton mile, but 
where they do not they can be ascertained by 
dividing the tons and passengers carried one 
mile by the freight and passsenger train mile- 
age respectively. A good report should also 
show the average number of cars empty and 
loaded in each freight train as well as passen- 
gers in each passenger train, and the average 
amount of freight and number of passengers 
in each car. These figures are important, 
especially when examined in comparison with 
the same figures of previous years, and also 
with current figures of other roads. If there 
is a large haulage of empty cars it indicates 
insufficient equipment or poor management. 
If the tonnage per train is small, it indicates 



ANALYZING RAILROAD SECURITIES 83 

poor locomotives, bad roadway, weak equip- 
ment or short sighted or neglectful manage- 
ment. 

By examination in a comparative way of all 
such figures as these, together with weight of 
rails, character of road bed, etc., we get at the 
real physical condition of the road, which is, 
as pointed out above, a matter of very great 
moment in an analysis of the property and its 
securities. 

The volume and description of equipment 
comes under the head of "physical character- 
istics" also. A good railroad report will show 
the number of locomotives, their average 
weight and age, and also the quantity and 
character of each kind of car owned by the 
company. These figures are particularly im- 
portant nowadays and should be given in a 
clear and exhaustive manner, for the reason 
that such vast development has taken place 
in the capacity of locomotives and freight cars 
during the past few years, that mere numbers 
may be very misleading. In the matter of coal 
cars, for instance, great strides have been made 
in the size and capacity per car, so that a road 
might today own but 1,000 coal cars, the capac- 
ity of which might exceed that of 3,000 cars 
of twenty years ago. Hence, clear and detailed 



84 ART OF WALL STREET INVESTING 

descriptions of equipment should always be 
given. 

The equipment figures should be studied in 
comparison with those of previous years in 
order to be read aright. This is easily done in 
the cases of the Norfolk & Western and Read- 
ing Company reports. 

2. Earning Power. Having familiarized 
oneself with the physical characteristics of a 
road as outlined in the foregoing pages, the 
next step for the investor or student to take 
is to ascertain and then analyze the earning 
power of the property. This is done through 
an examination and analysis of the income or 
revenue account. Every report of course con- 
tains such an account, and it is often the most 
conspicuous statement published in the report. 
Usually it is too much condensed, but some- 
times is presented with satisfactory detail. For 
the sake of simplicity there is presented below 
a sample of the usual form, omitting all detail, 
as applied to a railroad system of 600 miles in 
length. 



ANALYZING RAILROAD SECURITIES 85 

Per mile. 
Gross earnings from operation $12,000,000 $20,000 
Operating expenses 8,000,000 13,333 

Net earnings 4,000,000 6,667 

Other income 250,000 417 

Total income 4,250,000 7,084 

Fixed charges 3,250,000 5,418 

Balance 1,000,000 1,666 

Dividends 600,000 1,000 

Surplus 400,000 666 

The income from a railroad is chiefly from 
operation, but a portion may also arise from 
interest on investments or loans or income 
from rentals. The gross income from opera- 
tion embraces: (a) revenue from passenger 
transportation ; (b) revenue from freight trans- 
portation; (c) revenue from mail, expressage, 
storage, etc.; (d) revenue from car mileage, 
switching, etc.; (e) revenue from telegraph 
companies. 

The income from all these items should, of 
course, be shown in gross, and the laws of the 
states usually so require it. Rebates, being 
illegal, should not be included in operating ex- 
penses, but should in all cases where they exist 
be deducted from gross earnings. . Such 
charges as commissions should naturally go 
into operating expenses. In nearly all reports 



86 ART OF WALL STREET INVESTING 

the revenue from these several different 
sources is given separately, and the figures are 
easily understood and compared. There is lit- 
tle room here for mistakes or inaccuracies. 

Separate statements of incomes of leased 
properties should be given in railroad reports 
having such sources of income, while that of 
all proprietary branches or lines should natu- 
rally be included in the general income ac- 
count. 

Operating expenses is the one item in a rail- 
road report which should always be examined 
with the greatest care. It is the account most 
readily manipulated, and through its dissection 
one can most clearly judge the character and 
management of the property. To this account 
the company should charge all expenditures 
necessary to carry on the business of the road 
and leave the property at the end of the year 
in fully as good condition as it was at the 
beginning of the year. Actual improvements 
to the property may be charged to the capital 
or construction account. 

Operating expenses are divided into four 
classes: (a) maintenance of way and struc- 
tures ; (b) maintenance of equipment ; (c) con- 
ducting transportation; (d) general expenses. 
The Interstate Commerce Commission long 



ANALYZING RAILROAD SECURITIES 87 

ago officially classified operating expenses in 
this way, and also sub-divided each of these 
classes into more than fifty sub-divisions. 

Maintenance of way and structures, as its 
title indicates, embraces all charges made in 
connection with keeping up to the proper 
standard the roadway, buildings, etc. It is 
properly divided as follows: (1) repairs of 
roadway; (2) renewals and repairs of rails and 
ties; (3) renewals and repairs of stations, 
crossings, culverts, buildings, bridges, docks, 
wharves, fences, etc. 

Repairs of roadway embraces cost of ballast, 
clearing of tracks from snow and ice, re-ballast- 
ing of tracks and wages and supplies pertaining 
to this department. Renewals and repairs of 
rails and ties cover all cost of new rails and ties 
and the laying of same. Some companies 
charge to construction account the entire cost 
of new rails, less the amount for which the old 
rails may be sold. But this method is not cor- 
rect. Properly the company should charge to 
construction account only the amount received 
for the old rails, the difference being charged 
to the maintenance account. All railroads find 
it necessary to replace a certain proportion of 
rails each year, and this practice should not be 



38 ART OF WALL STREET INVESTING 

neglected- The other items in the maintenance 
account are largely self-explanatory. 

Maintenance of equipment refers entirely 
to engines and cars. This account should be 
charged with all money spent to keep the 
company's rolling stock in fully as good and 
effective condition as it was at the beginning 
of the year. Some companies, instead of mak- 
ing proper replacement out of earnings, will 
allow equipment to depreciate and in time be 
destroyed and then replace it out of capital ac- 
count. Companies also sometimes postpone 
these renewals or repairs. Such customs are 
to be condemned and careful comparative ex- 
aminations should be made. 

Conducting transportation embraces all ex- 
penses incident to hauling or transporting 
freight or passengers. It includes many items 
such as salaries and wages of all employees 
who are engaged in the actual operation of the 
road, and all supplies used for this particular 
; ose. 

General expenses include salaries of officers, 
legal expenses, insurance, etc., and, of course, 
are usually much smaller in amount than the 
figures in the other divisions mentioned above. 

Fixed charges usually include taxes, inter- 
est on funded and floating debt, rentals and 



ANALYZING RAILROAD SECURITIES 89 

sinking funds. Taxes should properly be in- 
cluded in operating expenses, but in the major- 
ity of cases they are placed in fixed charges. 
It makes little difference, provided they are 
clearly and separately stated, but it often mis- 
leads the superficial investor if they are not 
deducted before "net earnings' , are announced, 
a9 he is prone to forget that the frequently 
large item of "taxes" must be taken out before 
interest and dividends. This often happens in 
examining the monthly and quarterly earnings 
statements given out to the news agencies and 
papers by the companies. 

Interest on funded and floating debt should 
be stated clearly and in detail, and in connec- 
tion with it should be given a list of the kinds 
and amounts of bonds outstanding, with the 
interest charge thereon, and also, if possible, 
the character of their particular lien, showing 
which are prior in security to the others, etc. 
Rentals should, of course, be stated in detail 
and so should sinking funds. After all these 
items are deducted, including special charges, 
if there are any, the balance is "surplus," the 
division of which is in the province of the 
stockholders. It is the net profit of the con- 
cern, and out of it are paid the dividends on the 
stocks of the company. What remains after 



go ART OF WALL STREET INVESTING 

dividends are deducted is net surplus and is 
usually added to a "profit and loss" or "surplus 
income account." 

Examination of this "income statement" fur- 
nishes the information necessary to know the 
"earning power" of the railroad. By the re- 
duction to a "per mile basis" comparisons with 
other roads doing the same class and char- 
acter of business is readily made. 

3. Financial Characteristics. Having famil- 
iarized oneself with the physical and earning 
power of a railroad property, the next step is 
to examine its financial side. This is taken up 
through the analysis of the company's balance 
sheet. Practically nothing can be known of a 
railroad's financial condition unless the finan- 
cial statement or balance sheet is carefully 
examined and dissected. 

The balance sheet consists of a statement of 
the company's assets and liabilities in con- 
densed form. It embraces the following sub- 
jects: Capital assets; current assets; capital 
liabilities; current liabilities; profit and loss, 
the latter being either a deficit or surplus, as 
the case may be. Some roads condense their 
balance sheet entirely too much when insert- 
ing it in the annual report while others do not 
condense enough. In many cases also the mis- 



ANALYZING RAILROAD SECURITIES 91 

take is made of not being explicit and clear 
enough in the insertion of items. 

Capital assets consists of: (a) property and 
franchises, equipment and plant, usually car- 
ried under the title of "Cost of road and equip- 
ment"; this is commonly known as the con- 
struction account ; (b) investments in securities 
and real estate ; (c) sinking fund accounts. 

The construction account is supposed to rep- 
resent the total amount of capital invested in 
the road and its equipment. It is frequently 
the case, however, that certain other items, 
such as discounts on securities sold, are 
charged to this account. This account also 
usually takes care of special charges and ex- 
penses made in the financing of capital issues, 
reorganizations of the property, and so forth. 
The account is in a sense rather an elastic one 
and the charges in it are capable of great mis- 
use. Properly the railroad should itemize the 
charges which are made to this account during 
the year, in order that the stockholders may 
know exactly how to account for the increases 
which may appear. If this were always done it 
would not be possible for any railroad manage- 
ment to juggle with this account as is some- 
times done. There have been instances in the 
past where the construction account has been 



92 ART OF WALL STREET INVESTING 

made the receptacle for all sorts of items repre- 
senting little or no value. For instance, in the 
case of the old Atchison Railroad, reorganized 
in 1895, it was found that out of a construction 
account carried in the balance sheet at over 
$95,000,000, more than $40,000,000 represented 
nominal entries such as discounts on bonds, 
reorganization expenses, etc. 

"Investments in securities or real estate" is 
not as clearly shown in most railroad reports 
as it should be. All the large roads own vari- 
ous stocks and bonds of other roads, which 
have been acquired in many ways; sometimes 
by direct purchase or control, by original sub- 
scription, by exchange of securities, or in pay- 
ment of advances made or construction work 
done. If these items were made explicit 
enough it would be a comparatively easy mat- 
ter to ascertain whether they were being car- 
ried at too high a valuation in the balance 
sheet. In addition to this, it is necessary to 
compare these items in connection with the 
item on income from investments in the income 
account. It can be fairly well ascertained by 
such a comparison what the real value of the 
investments are and whether they are over- 
valued in the balance sheet. There are cases, 
of course, where one railroad property will ac- 



ANALYZING RAILROAD SECURITIES 93 

quire, for control in a strategical sense, the 
securities of another property and not merely 
for the income to be derived directly therefrom. 
But when this is the case, it is usually so evi- 
dent that it is not necessary to have it stated 
explicitly. 

Sinking funds should be shown in the bal- 
ance sheet in detail; showing each kind of sink- 
ing fund and bond separately. Car trust pay- 
ments, where there are any, should be treated 
in the same general manner. 

The current assets of a company include all 
movable and changable assets excepting mate- 
rial supplies, which may be in use for the pur- 
pose of liquidating the general business debts 
of the company, independent of the capital 
assets. The main headings under current as- 
sets are : (a) cash on hand and on deposit ; (b) 
loans and bills receivable; (c) accounts receiv- 
able; (d) due from other companies and indi- 
viduals; (e) due from companies, agents and 
officers; (f) advances to other companies: (g) 
sundry assets. 

The item "cash," of course explains itself. 
Loans and bills receivable is not ordinarily a 
large account. It represents money owed by 
shippers for freight transported, and so forth, 
and may also represent loans made by the road 



94 ART OF WALL STREET INVESTING 

or notes held by the road. If the item of 
"loans" increases from year to year it is not a 
good thing, unless there are special reasons 
given for it. "Accounts receivable" explain 
themselves, as does the item due from other 
companies and individuals. "Advances to 
other companies," if large, should be carefully 
examined. It may mean money loaned by the 
company to some weak, struggling allied com- 
pany whose bonds may be guaranteed by the 
main company, or of which control is held in 
some way. These advances may be small and 
therefore only nominal, but if they continue to 
grow it may mean that the parent company 
is advancing money which may never come 
back to it at all. The chief importance of the 
item lies in the change it may produce on the 
other side of the balance sheet. 

The items, "due from agents and officers," 
and "sundry assets," explain themselves. The 
smaller they are kept from month to month 
and year to year, the healthier the condition of 
the road is apt to be. 

"Capital liabilities" consists of stocks and 
bonds only. There are several kinds of stock 
and many kinds of bonds which require no 
description here, as they have been especially 
considered in Chapters II and III. The 



ANALYZING RAILROAD SECURITIES 95 

balance sheet should show the actual amount 
of capital stock outstanding, whether owned 
by the company or not. If the company has 
any of this stock in its treasury, this latter 
should be shown as an asset on the other side 
of the balance sheet. The various kinds of 
bonds should be separately shown, the actual 
amount outstanding being given in each case. 
By comparing these amounts with those of 
previous years, the changes and increases can 
be readily ascertained. In most railroad re- 
ports, separate detailed statements are fur- 
nished describing the funded debt, and in some 
cases showing the actual property on which the 
different mortgages are secured. 

"Current liabilities" are made up of several 
important items which usually come under the 
following heads: (a) loans and bills payable; 
(b) accounts payable ; (c) pay rolls and vouch- 
ers; (d) interest and dividends accrued; (e) 
due to other companies; (f) sundry liabilities. 
These items are generally sub-divided into 
"floating debt" and "operating liabilities." The 
"operating liabilities" are generally purely cur- 
rent, and do not usually represent more than 
one or two months items. If they extend much 
beyond this, it is often the case that the road 
is running behind and its management is in a 



96 ART OF WALL STREET INVESTING 

bad way. The important item to be examined 
in current liabilities is "loans and bills pay- 
able." If this item is small and does not 
grow from year to year it may mean very lit- 
tle. If it does grow, however, it usually means 
that the company is borrowing money tempo- 
rarily for construction or improvements which 
it intends to take care of with some permanent 
security, such as stock or bonds later on. 
If this is not the case and no new work is being 
undertaken, then it surely means that there 
will be trouble ahead. It is better if a railroad 
has no loans or bills payable, and in normal 
times a well-managed property will not allow 
this item to expand, even if it is doing a good 
deal of building. It will generally be found 
more economical to finance its capital require- 
ments as it goes along. 

The item "accounts payable" is not signifi- 
cant unless it shows rapid increase in amount. 
This is also true of other items, such as pay- 
rolls and vouchers, traffic balances, etc. The 
item "interest or dividends accrued" is gener- 
ally off-set by "current assets" on the other 
side of the balance sheet. 

In addition to the items in the balance sheet 
mentioned above there is always the one item 
of "profit and loss," or "surplus," which is 



ANALYZING RAILROAD SECURITIES 97 

always found on the liability side, when the 
company is in sound condition. Theoretically, 
it represents an actual surplus, but as a matter 
of fact, it does not always represent this, as the 
money supposed to be contained in the account 
is usually absorbed somewhere else in the ac- 
counts of the company. 

In the foregoing chapter the chief points 
in a railroad report have been referred to. 
Very few railroads give all the essential facts 
as clearly as they should; this being particu- 
larly true of the physical characteristics. 
There are, however, various ways by which 
the investor can ascertain many facts regard- 
ing the physical status of a railroad outside of 
an annual report. As for the financial statis- 
tics, it is nowadays a comparatively simple 
matter for anyone to secure the necessary 
facts regarding any railroad in the country, 
large or small, through the Interstate Com- 
merc Commission of Washington. The only 
drawback of this method is that the reports 
of the Department are not made up promptly 
enough for the use of many prospective invest- 
ors. 



Tractions and Industrials 

>T<HE investment market for industrial and 

-** traction securities has undergone a vast 
development in Wall Street during the past 
half dozen years. Previous to that time a thor- 
ough discussion of Wall Street could be made 
without any particular reference to this sub- 
ject, but nowadays a large proportion of the 
transactions there are in either industrial secur- 
ities or those of the various public service cor- 
porations. There are certain features under- 
lying traction or other franchise corporation 
securities which do not affect railroad securi- 
ties to any extent. It is true that steam rail- 
roads are in a broad sense "franchise" corpor- 
rations, but the franchise is not the important 
feature as it is in the case of a street railway, 
gas, electric light or water company. In the 
promoting or developing of any of these the 
franchise is regarded as the fundamental thing 
and without it no company can operate at all, 

99 



ioo ART OF WALL STREET INVESTING 

In the case of the street railway the fran- 
chise does not usually merely authorize the 
company to construct a railroad through a 
piece of property after it has bought that prop- 
erty, as does the steam railroad franchise, but it 
conveys to the corporation the exclusive right 
to operate over public property for a certain 
term of years ; perhaps for an unlimited period 
of time. A franchise of this kind does not 
merely give a company a legal right to con- 
struct and operate, but it gives it a more or less 
exclusive right ; and on the value of this privi- 
lege., whatever it may be, depends entirely the 
value of the securities which are built upon it. 
In examining, from the investor's standpoint, 
the bonds or stock of a franchise or public util- 
ity corporation, we should before all else exam- 
ine the franchise. To do this we must ascertain 
its length, its scope, the terms or conditions of 
its renewal, and its limitations, if it has any. 
We must also bear in mind and carefully weigh 
the character of the community which grants 
the franchise, and not overlook the possible 
effect of change in public sentiment. While a 
city or other municipality cannot as a rule can- 
cel a franchise which has been legally granted, 
and with the terms of which the company has 
complied, yet there are methods whereby the 



TRACTIONS AND INDUSTRIALS 101 

community can, if it so elect, take to itself, 
through taxation, what is generally termed the 
"unearned increment" in the franchise. For 
instance, a city may by legislation limit the 
rate of fare which the company may be allowed 
to charge ; it may insist upon a transfer system 
which will tend to reduce the income of the 
railroad; it may adopt a franchise tax law re- 
quiring the company to pay into the city's 
treasury a certain proportion of its earnings 
in addition to the amount paid for ordinary 
taxes. This feature of the franchise question 
is coming to the front very rapidly nowadays 
and it is quite necessary for the intelligent 
investor to be thoroughly informed along this 
line. -.The franchise corporations are purely 
modern institutions, and, like the industrials, 
have nearly all been organized on a more or 
less inflated basis. For instance, the various 
properties owned and controlled by the New 
Jersey Public Service Corporation are capital- 
ized for over $210,000,000, and yet they could 
probably be replaced, aside from the franchise 
values, for less than $80,000,000. The differ- 
ence, of course, is supposed to represent the 
actual value of the franchises, and as these 
values are in most cases very tangible and 
growing rapidly, it is claimed that they should 



102 ART OF WALL STREET INVESTING 

be represented by a reasonable amount of 
securities. The danger in this argument, how- 
ever, from the investor's standpoint, lies in the 
fact that the communities themselves all retain 
the taxing power and have a perfect right, if 
public opinion so elects, to tax into the public 
treasury the entire value of these franchises. 
Should this program be generally pursued 
throughout the country it will readily be seen 
that both bonds and stocks of traction and 
other public service companies which merely 
represent this current franchise value, will 
largely evaporate into nebulous ether. 

Industrial securities are similar to tractions 
in many ways. They also depend more or less 
on a franchise right or on some special legisla- 
tion, which gives them a benefit which they 
have capitalized. In the case of the United 
States Steel Corporation, for instance., not only 
has the actual cost of the manufacturing prop- 
erties been fully capitalized, but the company 
has issued large amounts of securities to repre- 
sent the estimated values of its ore and coal 
lands ten or twenty years in the future and has 
also capitalized in a very liberal manner the 
special benefits which it enjoys because of pro- 
tective tariff legislation, patent rights, shipping 
facilities, contracts, etc. These things, while 



TRACTIONS AND INDUSTRIALS 103 

apparently permanent enough at the present 
time, are still not fundamental values and can 
easily be removed through the force of public 
sentiment. Not only may these special advan- 
tages be removed, but the people may some day 
decide to clap heavy taxes on ore, coal and 
other lands now taxed but lightly. 

This is not true, however, of the steam rail- 
road advantages, which are chiefly made up of 
rights of way and terminals which originally 
were of not much importance, but which have 
shown enormous appreciation in value because 
of the great influx of population and general 
development of the country during recent 
decades. While the steam railroads are to a 
degree subject to legislative regulation and tax- 
ation, yet the special advantages which they 
enjoy are so much more firmly secured than 
those of the traction and industrial companies, 
that danger of any real and serious disturbance 
of these advantages is comparatively remote* 
It is true that sentiment is growing more or 
less rapidly nowadays in favor of government 
control or ownership of steam railroads, but it 
is not likely that the latter will be brought 
about in a way which will be particularly detri- 
mental to the interest of the holders of any- 
thing but the most inferior classes of railroad 



io 4 ART OF WALL STREET INVESTING 

securities. Masses of traction and industrial 
securities are vulnerable because of the fact 
that such a large proportion of them are based 
on purely speculative foundations, while the 
majority of railroad securities represent much 
more real value, which has been created in one 
way or another over a longer period of time, 
and is much more certain of permanency. 

In judging industrial and traction securities, 
therefor, the methods which have been out- 
lined in other chapters for the analysis of steam 
railroad securities should be applied only in a 
very qualified sense. The features pointed out 
above should be constantly borne in mind as 
the most important factors which are likely to 
affect the present or future values of the securi- 
ties. 



VI 

Investment versus Speculation 

SPHERE are two classes of people in Wall 
-*- Street who invest money in securities. 
One class consists of actual investors. The 
actual investor is the man who invests for him- 
self and buys securities to keep. He either 
does this directly or does it through a bond 
dealer or other broker in securities. When the 
dealer buys securities he has certain motives 
which the investor himself has not, and in mak- 
ing his purchases takes certain other factors 
into consideration. The individual investor 
does not give much thought to the temporary 
condition of the market, and it does not matter 
much to him what the temporary course of 
prices may be. But the broker or bond dealer 
must not only take into consideration the in- 
trinsic value of the investment itself, but he 
must also consider the condition of the money 
market, and of various other factors of a more 
or less temporary nature which may affect the 

105 



106 ART OF WALL STREET INVESTING 

price of the security. In other words, he must 
buy as cheaply as he can, for the simple reason 
that he is not an investor and buys simply for 
the purpose of turning over the security at a 
profit to someone else. 

The distinction between these two men indi- 
cates the cardinal distinction between the in- 
vestor and the speculator. While the bond 
dealer is not a speculator in the commonly ac- 
cepted sense, yet his motive is, in a more lim- 
ited and conservative way, of the same nature 
as that of the speculator. The latter buys to 
make a profit on the principal. The investor 
buys to secure an income; that is to say, he 
places his money in what he thinks or is led to 
believe is an absolutely secure piece of prop- 
erty, and he has no other purpose in view than 
that of receiving a current return upon it in the 
shape of interest or dividends. Such is the 
pure investor, while the pure speculator is one 
who pays no attention to dividends and inter- 
est as an income, but is actuated entirely with 
the idea of profit on principal. Of course, there 
are many men who are both investors and 
speculators, and a large number follow the 
practice of putting money in what are known 
as semi-speculative investments. A semi- 
speculative investment is one which furnishes 



INVESTMENT VS. SPECULATION 107 

an income in the shape of dividends or interest, 
and at the same time is supposed to promise a 
reasonable appreciation in principal over a cer- 
tain period of time. For instance, the man who 
puts money into a stock like the United States 
Steel preferred, might reasonably be called a 
semi-speculative investor. He invests not 
merely to get a liberal dividend, but has a 
theory that as the stock is not selling very high 
there may be a fair chance for appreciation in 
the principal, in the event of which he will sell 
out and re-invest his money with the profit 
made in some other security. While this 
method has proven successful in many cases, 
yet there is necessarily a large element of 
speculation in it when carried to an extreme, 
for if a serious mistake is made by the investor, 
a large proportion of his principal may be 
wiped out, and in this case he will quickly find 
that it would have been much wiser for him 
to have confined himself entirely to securities 
which have no speculative value, but are 
bought and sold entirely on an investment 
basis. 

In addition to pointing out the distinction 
between investing and speculating in Wall 
Street, it is worth while to also show the line 
between speculating and what is commonly 



2to8 ART OF WALL STREET INVESTING 

known as gambling in stocks. The man who 
speculates in stocks acts on information which 
he has ascertained and analyzed in one way or 
another. To be sure, his judgment may be 
entirely at fault, but he generally has a plaus- 
able business reason for buying or selling such 
and such a security. For instance, he may have 
made up his mind that a certain railroad stock 
is selling too low in view of current earnings 
and immediate prospects, such, for instance as 
the crop outlook, and based on this he may 
decide to buy for a rise. This is generally 
known as a "speculation/ 5 A "gamble," on 
the other hand, is where a man buys and sells 
on a blind chance, without any particularly 
sane reason, except that he thinks that a turn 
in the market up or down is due, or that the 
pools and "big fellows" mean to give a twist 
to the stock. A large portion of the gambling 
is done in bucket shops, but a respectable 
amount of it also finds its way into the offices 
of the larger brokers and commission dealers. 
There are a limited number of men who gam- 
ble in stocks on a very large scale and some- 
times make as well as lose very large amounts 
of money. This is also true of the speculative 
market, and nowadays actual speculation in 
stocks is carried on on an enormous scale, the 



INVESTMENT VS. SPECULATION 109 

speculative leaders in many cases being some 
of the most prominent men in the Street. The 
great aggregate of speculation is made up of 
these men with their many thousands of 
smaller followers in all parts of the country* 



VII 

" Get-Rich-Quick " Schemes 

^ I ^HERE are many methods in vogue for 
*- inducing people to part with their money, 
but the most effective way to interest a certain 
very considerable portion of the American pub- 
lic in propositions the ultimate purpose of 
which is the separation of the individual from 
his property, is through what is known in Wall 
Street as the "get-rich-quick" scheme. It is an 
old saying that the American public likes to be 
fooled, and judging from the way these many 
fraudulent schemes keep bobbing into sight 
with never ending regularity, it would seem 
that the saying has lost none of its truthful- 
ness. 

There are get-rich-quick schemes of many 
kinds, and they are exploited in many ways; 
sometimes through the columns of newspapers, 
sometimes in financial or mining journals, but 
more often through circulars or other advertis- 
ing matter. The most successful are usually 

in 



ii2 ART OF WALL STREET INVESTING 

mining propositions, although many other 
kinds have flourished equally as well. One of 
the most notorious promotion frauds of this 
kind was a "guaranteed egg company," the 
stock of which was offered for sale in New 
York City a few years ago. The promoters of 
this company sent broadcast a roseate pro- 
spectus, offering the sale of 7% guaranteed pre- 
ferred stock at par, with a large bonus in com- 
mon stock. Careful inspection of the prospec- 
tus revealed the fact that the prospective earn- 
ings, which were to amount to a fabulous sum, 
were to result from the sale of eggs at high 
prices, the said eggs to be laid without fail at 
a certain unceasing rate by several thousand 
hens, which were the entire stock in trade of 
the company. These hens were supposed to do 
the double work of hatching new broods of 
chickens and at the same time laying their 
regular guaranteed proportion of eggs. It was 
also assumed that only hens and not roosters 
would be hatched and that every egg would be 
good. The essence of the "guarantee" on the 
preferred stock appeared to be wholly based on 
the theory that the hens had somehow been 
forced into a promise to lay eggs night and 
day, if need be, in order not to allow the pre- 
ferred stock dividends to lapse in any possible 



"GET-RICH-QUICK" SCHEMES 113 

way. The company was capitalized in the 
neighborhood of a million dollars and its only 
tangible property, aside from the chickens, was 
a farm of twenty acres located about thirty 
miles from New York. 

Absurd as this whole proposition was, there 
were enough investing idiots walking around 
loose in New York City to "nibble" at this bait 
to the extent of over $80,000 in cash. And it 
was stated on good authority that most of 
these subscriptions came from New York City 
people who had never seen a chicken farm in 
their lives, and probably didn't know any more 
about the chicken and hen laying business than 
the chickens themselves knew about the pre- 
ferred stock they were assumed to be guaran- 
teeing the dividends on. Shortly after this 
exploitation, the promoters quietly folded their 
tents and stole away, as certain kinds of pro- 
moters have a way of doing, with the result 
that the innocent but superficial investors are 
still waiting for their dividends, and are hold- 
ing their stocks as "permanent investments." 

Another instance of the get-rich-quick 
scheme which fooled a large number of sup- 
posedly sane investors was the promotion of 
the "sea water gold" enterprise a few years 
ago. A certain man named Jergensen, who 



ii 4 ART OF WALL STREET INVESTING 

was more avaricious than honest, happened to 
discover an article in an encyclopaedia which 
brought to his knowledge the fact that sea 
water contains a small percentage of gold, but 
that no method has ever been discovered 
whereby the separation of the two could be 
brought about. He then devised a scheme for 
pretending that he had himself invented a 
secret process for doing this very thing, and 
thereby induced investors to pass their ready 
cash his way. He built a small plant on the 
water's edge at South Lubec, Maine, a portion 
of the plant being constructed out of sight, and 
under water. He then secured a small quantity 
of gold bullion (a small genuine gold brick) 
and exhibited it to certain people in the city 
of Boston, at the same time making the state- 
ment that it was the result of a test of his 
secret process for washing gold from sea 
water. His incredulous listeners were invited 
to go to the government assay office with him 
to test the genuineness of the little brick. This 
they did and to their surprise found that it was 
all pure gold. Then, as a further proof of his 
discovery, Jergensen invited them to go to 
South Lubec with him and see his plant. They 
did so and saw the mysterious looking machin- 
ery, part of which was under water. They 



"GET-RICH-QUICK" SCHEMES 115 

were duly impressed. He then explained that 
he could not let them see how he did it, as he 
must naturally guard his secret. But the next 
morning he appeared with a small can full of 
new gold dust, which he said he had secretly 
washed out during the night. After that, for 
a whole week, while his visitors remained, he 
appeared every morning with a moderate quan- 
tity of gold dust which he exhibited as a result 
of the previous night's work. As this produc- 
tion steadily continued his audience grew. 
Others came on from Boston and the wonder- 
ful discovery was on the lips of a steadily in- 
creasing number of people. When he next 
went to Boston, taking the gold dust with him, 
and converted it into cash at the assay office, 
many apparently shrewd people were thor- 
oughly convinced and regarded his claims as 
absolutely proven. He then organized a com- 
pany and began to sell stock, and as the snow- 
ball had begun to roll, it very quickly increased 
to gigantic proportions. 

Within a short period, investors in Boston 
and vicinity were sacrificing good bonds and 
stocks, withdrawing savings bank deposits, and 
generally falling over each other in a mad rush 
to get in on the ground floor in this sea water 
gold bonanza. It was afterwards estimated 



n6 ART OF WALL STREET INVESTING 

that before the fraud was publicly exposed, Jer- 
gensen and his accomplices had secured nearly 
a million dollars. The final outcome was, that 
Jergensen secretly escaped to Europe with 
most of the money, and his victims are whist- 
ling for their "great profits" to this day. 

Many other schemes equally as fraudulent 
have been worked during recent years in Wall 
Street and elsewhere, and though constantly 
exposed in the newspapers, yet new ones crop 
up nearly every day, and the public continue 
to bite. The advertising columns of the news- 
papers and magazines are full to overflowing 
with roseate propositions for the investment 
of money; gold and copper mines; industrial 
undertakings; new railroad projects; traction 
companies, and various other promotion 
schemes. Millions of dollars are invested every 
week by small investors in this country, and a 
large proportion of it is constantly "steered" 
into unsafe channels, with a resultant loss to 
thousands of investors. As an illustration of 
how persistently and easily unsuspecting peo- 
ple are misled and swindled, instance the fol- 
lowing: A very conspicuous concern has been 
"operating for the past five years or so one of 
the largest and cleverest mining swindles ever 
known in the United States. Sumptuous 



"GET-RICH-QUICK" SCHEMES 117 

offices are maintained in Broadway, New York, 
and about forty branch offices have been estab- 
lished in various cities of the United States and 
Canada. A number of honest men have been 
drawn into the scheme by baits of alluring 
commissions, and have peddled the rotten 
shares of this firm of stock-jobbers among their 
friends and neighbors, to the loss of their own 
peace of mind and reputations. The plan of 
this swindle is neat and comprehensive. The 
firm announced that it would operate on the 
law of averages, and by handling many mines 
the good ones v/ould make up for the failures. 
Considerable bluffing has been done in the way 
of crude mining operations, but none of the 
'mines' have proven successful, and none are 
likely ever to be successful. 

"This firm of sharpers began paying divi- 
dends on shares, when no profits were earned, 
for which they should be jailed for the common 
swindlers that they are. Stock in the worth- 
less companies were exchanged for stock in 
equally worthless companies whenever share- 
holders grew tired, and the victims of conspir- 
acy were tolled along by the 'dividends' paid 
out of the money they had themselves fur- 
nished. Recently cash dividends have been 
suspended, and 'scrip' dividends substituted 



iiS ART OF WALL STREET INVESTING 

therefor. It is reported that this firm has 
bilked something like 16,000 small investors, in 
the United States and Canada, to the tune of 
several millions of dollars." 

The methods for promoting all kinds of swin- 
dles have in recent years been refined down to 
an exact science. Experience has proven that 
the most vulnerable class of people to be at- 
tracted by investing swindles aside from 
women, are ministers, doctors, teachers and 
other professional people. There are in New 
York a number of concerns who make a busi- 
ness of supplying classified lists of possible 
investors for the use of those who wish to ex- 
ploit mining swindles and other schemes. 
These lists are classified into ten dollar in- 
vestors, twenty-five to one hundred dollar in- 
vestors, one hundred to five hundred dollar in- 
vestors; and investors having $10,000 or more 
available. The "ten dollar investors" are 
mostly made up of a class of people who are 
in the habit of taking a small "flyer" occasion- 
ally of not over ten dollars, investing this 
amount on the theory that it may turn out with 
a big profit, but that in any event the loss can- 
not exceed ten dollars. This class appeals to 
the swindler also, in spite of the fact that the 
amounts invested are so small, for the reason 



"GET-RICH-QUICK" SCHEMES 119 

that even if the scheme is exposed as a swindle, 
the individual amounts are so small that it 
would not pay any single person to resort to 
law for the recovery of his money. True it is 
that a large number of such investors, if acting 
in concert, would become a menace, but as a 
rule such investors are too widely scattered, or 
too unintelligent or indifferent to make any 
move of this kind. In number, these ten dollar 
investor lists run into the hundred thousands, 
and are the main avenue for floating all 
schemes of the cheaper and more openly fraud- 
ulent variety. 

The "twenty-five to fifty dollar" list is made 
up of country investors, Methodist and Baptist 
ministers, country doctors and all classes of 
teachers ; also barbers, waiters, hospital nurses 
and the general class of people who are able 
in one way or other to set aside for a rainy 
day from $25 to $100 per year. These lists are 
used in slightly more pretentious schemes, of 
course, with sometimes a little more merit to 
them. The $100 to $500 investors consist of 
doctors of slightly higher grade than those re- 
ferred to above ; also college teachers and pro- 
fessors, small Wall Street lambs, Episcopal and 
Presbyterian ministers, mercantile clerks, 
some country merchants and other thrifty peo- 



120 ART OF WALL STREET INVESTING 

pie who annually accumulate a few hundred 
dollars over and above their cost of living. 
Such lists are used for more pretentious 
schemes, and, in addition to the promotion of 
frauds, they are sometimes used in perfectly 
sound and legitimate enterprises. The higher 
grade lists, covering $1,000 to $100,000 invest- 
ors, largely explain themselves, and while they 
are as often used by schemers for offering their 
wares, yet as they are largely made up of more 
sensible and cautious people, they are not so 
popular in the "get-rich-quick" promoting fra- 
ternity of the larger lists of more modest in- 
vestors. 

While swindles are promoted to a gigantic 
extent through circulars and by mail, yet much 
business is also done through the medium of 
newspapers, magazines, and so forth. Many 
(but not all) of the large metropolitan dailies 
will sell advertising space in which notorious 
swindles are promoted ; magazines also of high- 
grade in other ways, constantly sell space for 
the exploitation of mining, real estate and 
other schemes; the columns of country dailies 
and weeklies are not only open as a rule to 
such schemes, but for a consideration they will 
often publish "write-ups" recommending or 
booming a particular enterprise. The "write- 



"GET-RICH-QUICK" SCHEMES 121 

ups" generally consist of editorial or other 
special articles which are prepared or endorsed 
by the promoters themselves, and they of 
course pass in the reader's mind as genuine and 
truthful. 

These are, of course, frauds of the most pal- 
pable kind and the publication of such matter 
is entirely unfair to the readers of the paper. 
It is a species of cheap and insidious deception 
which should, wherever found, be condemned 
in unmeasured terms. Another illegitimate 
method of the promotion of swindles is through 
trade journals, particularly in the mining indus- 
try. This country is nowadays flooded with 
mining newspapers and journals, which, while 
ostensibly independent and legitimate in their 
character and methods, are, as a matter of fact, 
actually owned and controlled by the same 
people who are engaged in the promotion of 
mining and other swindles on a gigantic scale. 
These journals are filled with special articles 
and editorials which recommend and describe 
in glittering terms, the stocks and possibilities 
of this and that enterprise in mining, or oil, or 
real estate, or manufacturing, in which they 
themselves are interested. This is a more mod- 
ern method of exploiting swindles than some 
of the others, and apparently has been most 
effective. 



122 ART OF WALL STREET INVESTING 

In considering roseate prospectuses and the 
various other plans which are constantly found 
in the public prints offering shares for 
sale, one of the rules of nearly universal 
application, which will usually go a long way 
toward the protection of the investor, is this: 
Always question any proposition offering 
stocks or bonds for sale where such offers are 
made directly by the company itself, and not 
through a banking house or other reputable 
concern. If no bankers are handling the sale 
of securities it is usually the case that there 
is something "shady" about the scheme. 
There are exceptions, of course, but not many. 
If the securities are offered by bankers and 
brokers, the next step should be to ascertain 
the standing, reputation and financial strength 
of the bankers or brokers themselves. Wall 
Street and the other financial centers of the 
country have their full share of irresponsible 
concerns of this class. 

The apparently plausible statement is fre- 
iquently made that money is saved to the com- 
pany and its stockholders by avoiding the em- 
ployment of a banker or agent to market secur- 
ties. But this is not so in ninety-nine cases out 
of a hundred. If a proposition has merit, the 
promoters always find it much more econom- 



"GET-RICH-QUICK" SCHEMES 123 

ical to go to a concern who have specialized 
and have developed the proper machinery for 
the floating of securities, rather than under- 
take to do it themselves. The banker not only 
has the clientele, but he has the organization 
for handling the business effectively and eco- 
nomically; and, of course, in many cases his 
prestige and general reputation have much to 
do with making the flotation a success. For all 
this he frequently charges a good round com- 
mission ; sometimes too much, perhaps, but not 
so often as is generally supposed. Indeed, it 
would in most cases upon investigation prove 
to be a fact that without the banking medium, 
the flotation would cost far more than the 
usual amount represented by an apparently 
heavy discount or commission. It is a part 
of the business of the banker to float securities, 
just as it is a part of the business of the trust 
company to pay coupons. People sometimes 
think it strange that a large corporation, with 
an office in New York City, should pay a com- 
mission to a trust company to cash the coupons 
on its own bonds each six months, when it ap- 
parently might do this work itself. But the 
answer to that is that the trust company main- 
tains the machinery and organization for pay- 
ing the coupons of not merely one but of per- 



124 ART OF WALL STREET INVESTING 

haps one hundred companies, and therefore 
can afford to do such work at a minimum cost 
and for far less than the corporation itself could 
possibly do it. 

It will be seen, after reading the foregoing 
chapter, that the simplest and quickest way of 
avoiding the "get-rich-quick" scheme, no mat- 
ter where or how presented or however roseate 
and plausible its promises and claims may be, 
is to never entertain any proposition which is 
not offered through a banker or other agent, 
and then, having adopted this rule, to go one 
step further: never have dealings with a 
banker, broker or financial agent until you have 
investigated and are satisfied as to his char- 
acter, standing and general reputation. 



VIII 

Reorganizations and Syndicates 

THE subject of reorganizations is, of course, 
too wide a one to treat adequately in a 
book of limited size and scope such as this, and 
it is only practicable to touch upon it briefly. 
Reorganizations in both railroad and industrial 
finance are brought about as a result of various 
causes; one of the chief being over-capitaliza- 
tion. In the period extending from 1893 to 
1897, a large number of the most important 
railroad systems of the country were reorgan- 
ized, and their capitalizations scaled down 
very extensively, — in some cases more than 
fifty per cent. In the same period many of the 
larger industrial combinations were also reor- 
ganized, the chief among these being the well- 
known Cordage Trust. 

It sometimes happens that a concern is re- 
organized for other reasons than insolvency. 
Thus, the Standard Oil Trust was re- 
organized, being changed from a trusteed ag- 

'25 



126 ART OF WALL STREET INVESTING 

gregation of separate companies to one large 
corporation of $97,500,000 capital. This change 
was made to conform to newly enacted laws, 
and as a partial concession to public senti- 
ment. A concrete example of the methods 
and purpose as well as the anticipated results 
of a reorganization can best be shown in the 
manner followed below 7 . In this way we will 
avoid the complexity which always results in 
analyzing an actual reorganization with its 
many details, whereas by creating a simple 
example as is done below, we demonstrate the 
principle without beclouding the mind of the 
student with incidental facts and figures. 

Let us assume the existence of a railroad 
system of 1,500 miles, known as the Great 
Southern Railroad Company. It is capitalized 
as follows: 

First Mortgage 6% bonds, due 1920 $3,000,000 

Second Mortgage, 5% bonds, due 1935. . . . 3,000,000 
Consolidated Mortgage 5% bonds, due 

I95O 2,000,000 

Preferred Stock (fi% cumulative) 3,000,000 

Common Stock 3,000,000 

Total capitalization (par value) $14,000,000 

It will be noted that to pay the interest on 
the three bond issues requires $430,000 per 
year, and if 6% is also paid on preferred stock, 



REORGANIZATIONS AND SYNDICATES 127 

$180,000 additional will be required, making 
$610,000 in all. To pay any dividend on the 
common stock would, of course, require a still 
further amount. 

Now let us assume also that the first mort- 
gage carries a sinking fund of $60,000 per year, 
which must be covered, of course, out of earn- 
ings. This will increase the total charges to 
$490,000 per annum, excluding the dividend 
charge. 

Over a period of six years the gross and net 
earnings of this road have resulted as follows : 

Gross Operating Net Fixed _ 

Earnings Expenses Earnings Charges l vrence 

1900. $2,000,000 $1,300,000 (65%) $700,000 $490,000 $210,000 + 

1901. 2,100,000 1,365,000 (65%) 735,000 490,000 245,000 + 

1902. 1,600,000 1,120,000 (65%) 480,000 490,000 10,000-- 

1903. 1,800,000 1,080,000 (60%) 720,000 490,000 230,000 + 

1904. 1,050,000 735,000 (70%) 315,000 490,000 175,000— 

1905. 1,400,000 1,050,000 (75%) 350,000 490,000 140,000— 
(In the last column the plus (+) sign indicates surplus, 

and the minus ( — ) sign deficit.) 

In examining the foregoing statement we 
note that in 1900 and 1901 the road earned a 
comfortable surplus over charges, and we can 
assume that a part of this surplus was paid 
out in preferred stock dividends. The road 
was pretty heavily bonded but it was operated 
on the theory that growing business would 
take care of these heavy requirements. But 



128 ART OF WALL STREET INVESTING 

in the third year, a very serious falling off in 
earnings occurred, owing to a crop failure, and 
the net earnings were not quite equal to the 
charges. In the fourth year, however, a sub- 
stantial recovery is made and a good surplus 
again shown. But in the fifth and sixth 
years further serious reverses occur and vast 
deficits are shown. In the endeavor to keep 
down expenses during these latter years, the 
roadbed has not been properly taken care of, 
equipment has run down at the heel, and the 
property has been "skinned" generally in 
order to show net results. It will be noted 
that in the earlier years the percentage of ex- 
penses to gross, even when the latter totals 
were larger, was 65%, a normal figure. But 
later, when the gross began to drop, the ex- 
penses were cut down in even greater propor- 
tion (except in 1904, when the gross fall was 
extraordinarily heavy) and practically no 
money was spent on the property to keep it 
up to the proper standard for doing business. 
The net result is that when 1905 arrives, the 
company is in a disastrous condition; and has 
not even available funds to meet its charges, 
not to mention money needed for absolutely 
necessary expenditures to maintain the prop- 
erty. Besides, its credit is gone, its securities 



REORGANIZATIONS AND SYNDICATES 129 

are selling at great discounts, and it is in no 
position to raise new capital. Its only course 
is to apply to the courts for a receiver, which 
it does. The receiver then takes charge and 
operates tha property, pending its reorganiza- 
tion. 

After certain examinations and delays, com- 
mittees representing bondholders and stock- 
holders get together, and in time a plan of 
reorganization is formulated and united upon. 
In this particular case the plan might reason- 
ably be worked out along the following lines: 

A new company is formed with an author- 
ized capital as follows: 

Common stock $ 5,000,000 

Preferred stock (4% non-cumulative) 2,000,000 

First Consol. 4% bonds 10,000,000 

Total $17,000,000 

The old second mortgage bondholders are 
then offered an equal amount ($3,000,000) of 
the new consol. 4% bonds in exchange for 
their holdings; the old consolidated holders 
are offered 50%' ($1,000,000) in new consol. 
4% bonds and 50% ($1,000,000) in new 4% 
preferred stock ; the old preferred stockholders 
are offered 20% ($600,000) in new 4% pre- 
ferred stock and 80% ($2,400,000) in new com: 
mon stock: the old common stockholders are 



i 3 o ART OF WALL STREET INVESTING 

required to pay an assessment of 10% ($300,- 
000) after which they receive $10 per share in 
new preferred stock and $30 per share ($1,- 
800,000) in new common stock. If this plan is 
carried through to a success the net results 
after completion will be as follows : 
There will be outstanding — 

Old First Mortgage 6% bonds (undis- 
turbed) $3,000,000 

New Consol. Mortgage 4% bonds 4,000,000 

New Preferred stock 1,900,000 

New Common stock 4,200,000 

Total $13,100,000 

There will be left unissued $6,000,000 of the 
new 4% consols, of which $3,000,000 will be 
reserved to retire the old first mortgage 6s 
when the latter mature, and the balance will 
be reserved for capital requirements. With the 
preferred and common stock not disposed of 
in the above statement ($100,000 in preferred 
and $800,000 in common), the reorganization 
committee and underwriting syndicates will 
be compensated for their work and reimbursed 
for their expenses. The total capitalization 
outstanding therefor, when the reorganiza- 
tion is completed, will be $14,000,000, exactly 
the same as was the case with the old com- 
pany. 



REORGANIZATIONS AND SYNDICATES 131 

Note, however, the changes that have been 
brought about. The reorganized company has 
received $300,000 in new cash and also has 
$3,000,000 of available 4% bonds in its treas- 
ury (a portion of which may be underwritten 
in the plan and sold immediately for use in 
improving the property) , and its fixed charges, 
including the old sinking fund, will have been 
reduced from $490,000 to $400,000 per annum. 
As the average annual net earnings of the 
property for the six year period were $550,000, 
the road is now in a financial position where it 
can immediately show a substantial surplus 
above its charges. Under the new regime, with 
gross earnings at $1,700,000 (the average for 
six years) and assuming average operating ex- 
penses of 66 2-3%, we would have a surplus 
above charges of $166,666, which would equal, 
besides the 4% dividends on the preferred 
stock, nearly 2% on the common stock. In the 
event of some of the treasury bonds being is- 
sued for improvements or acquisitions it would, 
of course, probably result that an equivalent 
increase in income would be shown. 

It is in the carrying through of a plan such 
as the foregoing, that the work of the under- 
writing syndicate comes in. The syndicate 
consists of a group of financiers, bankers or 



132 ART OF WALL STREET INVESTING 

others of financial standing and resourceful- 
ness, who band together and formally agree to 
guarantee the success of the plan. Usually a 
banking house or trust company of prominence 
becomes the syndicate manager. An agree- 
ment is then entered into by the syndicate 
to take all the bonds and stocks at a given 
price which are not taken by the original hold- 
ers themselves on the terms of the plan. In 
this way the success of the plan is insured, and 
the old holders who refuse to join in the reor- 
ganization are either given their money or 
bought out on a mutually satisfactory basis. 

The underwriting syndicate seeks its profit 
in two ways. First, through a commission 
from the new company, which usually comes 
in the shape of securities. In the foregoing 
case the syndicate would get $100,000 in pre- 
ferred stock and $800,000 in common stock. 
Second, the syndicate expects, as an addi- 
tional source of income, to sell at a profit 
through its syndicate managers, whatever 
securities it is obliged to take up in the under- 
writing. If these securities are not market- 
able, they are then either "tied up" and car- 
ried for a certain specified period, with a view 
of ultimate sale, or else they are delivered di- 
rectly to the members of the syndicate, who do 
what they see fit with them. 



REORGANIZATIONS AND SYNDICATES 13* 

Within the past ten years, and particularly 
since the great expansion of corporate enter- 
prise in both the railroad and industrial fields, 
the so-called syndicate underwriting business 
has grown to a position of great importance in 
Wall Street. There are certain concerns of 
large capital and resources who do practically 
nothing else. It goes without saying there- 
for, that the underwriting syndicate is a 
necessary part of the Wall Street machinery 
both in connection with reorganizations and 
new corporate enterprises and consolidations 
of all kinds. 



IX 

The New York Stock Exchange 

NEW YORK has no more entertaining 
public exhibition than its Stock Ex- 
change. It is one of the show places of the 
city. The visitor who far the first time looks 
down from a gallery upon its members in the 
act of transacting business, is astonished at the 
apparent confusion he witnesses. He seems 
to have entered a madhouse. The idea that the 
market values of our leading securities should 
be determined by what appears to him to be 
a howling mob of incurable lunatics, is incom- 
prehensible, But if nothing could be said 
against the Exchange, which is simply a big 
bazaar for the sale of bonds and stocks, except 
its tumultuousness and the seeming lack of 
dignity among its operators, criticism would 
have in it but an indifferent target for its shafts. 
Much graver questions grow out of its exist- 
ence. Is it a harmless institution? Is it a 
public blessing? Is it a public curse? 

i35 



i 3 5 ART OF WALL STREET INVESTING 

As a great central mart for current securi- 
ties, it is certainly of vast use. There is no 
reason why bonds and shares should not be 
publicly dealt in, and in large quantities, as 
well as dry goods; as well as corn and cotton 
and beef and kitchen vegetables. If the Stock 
Exchange transactions were restricted to the 
bona-fide buying and selling of bonds and 
shares, not a word could be justly said against 
it. But is it so restricted? Unfortunately, no. 
A main occupation is wagering on stocks; 
many traders while going through the form of 
buying and selling, simply bet their money 
upon the rise or fall of the shares they select, 
as they would upon the shiftings of cards or 
dice. The Exchange, while doing a large legiti- 
mate business, is also an immense speculating 
establishment. 

Its members are divided into two classes — 
those who execute commissions for others and 
those who deal on their own account. It is 
needless to say that among the latter are the 
boldest and sharpest speculators of the day. 
The careers of these men can be sketched in 
very few words. Through the exercise of supe- 
rior native wits or the accident of extraordi- 
nary luck, they flourish marvelously for a time ; 
but only, as a rule, to lose their heads and their 



THE NEW YORK STOCK EXCHANGE 137 

balance at the last and go down, often through 
a single disastrous transaction — faster than 
they went up. There are exceptions. Some 
flourish to the end, dying generally young — or 
retiring with estates unbroken. But they are 
exceptions. Wall Street is a place where few 
fortunes are made and a great many are lost. 
The stories of its magnificent triumphs, and of 
its equally magnificent wrecks, read like tales 
from "The Arabian Nights"; some of them 
like passages from "Dante's Inferno." Wall 
Street has had its suicides by the dozen, and 
will have plenty more. It would not be Wall 
Street without surprises. And yet there is a 
singular sameness in the ordinary trader's ex- 
perience. He runs an exciting, if at times a 
rough and stormy, career,, snatches or seems 
to snatch a good many pleasures by the way, 
makes and breaks with about equal abandon, 
wrecks his health in a hurry, dies early and 
suddenly, and then — well, then, when his af- 
fairs come to be settled, there are often found 
large blocks of utterly worthless shares, per- 
haps a fast horse or two, possibly a yacht or 
automobile, some costly souvenirs, a few solid 
assets, possibly heavy debts, or even actual 
bankruptcy. Poor fellow, everybody has for- 
gotten all about him. 



i 3 8 ART OF WALL STREET INVESTING 

Of the ordinary Wall Street speculator, how- 
ever clever or however favored for a time, it 
is perfectly safe to say that, if he lives long 
enough and sticks to the business, he will fin- 
ally come to grief. 

But how about Vanderbilt pere, who was 
more or less of a Wall Street operator all his 
many days, and a few others not wholly dis- 
similar if less conspicuous examples? 

Ah ! that brings us to a view of some of the 
interior workings of the New York Stock Ex- 
change that the public has little conception of, 
and which alone will give a correct under- 
standing of its real character. The popular 
idea is that the Exchange has upon its list, to 
be dealt in, all, or nearly all, prominent stocks 
and bonds of acknowledged value, impartially 
selected and solely because of their merits. 
There could be no greater misconception. We 
do now always find there the shares of hun- 
dreds of high grade securities, both stocks and 
bonds, representing corporations of high stand- 
ing, and large business success; railroads, 
industrials, municipal corporations whose man- 
agement is unexceptional, and whose securities 
are among the choicest investments. But if 
there is a company with a speculative board 
of directors, and whose stock has been watered 



THE NEW YORK STOCK EXCHANGE 139 

until it will float a respectable navy, an at- 
tempt is often made to place its shares on the 
Exchange's list. Or if there is a company that 
is absolutely controlled and directed by some 
particularly active and conspicuous manipula- 
tor, its stock may often be found at the same 
place. There never is, apparently, much diffi- 
culty in a big stock operator getting his issues 
upon the list. What has been the result? 
Simply that much genuine rubbish has been 
unloaded upon the public. 

Much, but not too much, has been said in 
condemnation of stock watering; of the produc- 
tion of corporate securities representing little 
or no cash investment, and which innocent per- 
sons are led to purchase in the belief that they 
are getting full values. But how is it that 
these speculative issues are so easily marketed, 
and the producers escape all responsibility for 
the impositions practised? Here is where the 
Exchange's "credit," so to speak, is often used. 
The Exchange is made the conduit through 
which the water is diverted to the investor's 
pockets. When it takes the stock upon its list, 
the Exchange becomes practically the seller, 
supplying the machinery and means of trans- 
fer, and it guarantees nothing. Whoever buys 
at its board is understood to take all risks, no 



i 4 o ART OF WALL STREET INVESTING 

matter how much deception is used. He may 
be victimized, but he has no redress. The Ex- 
change is simply the medium through which 
the over-issues have been marketed. It is true, 
of course, that without the facilities of the Ex- 
change, many of the stock watering frauds 
which have become historical never could have 
been successfully consummated. 

Once on the Exchange's list, seldom is a 
stock so worthless that, with a shrewd manipu- 
lator behind it, it cannot be at some time un- 
loaded. The process has been a simple one. 
First they are "washed" — singular how the 
idea of water runs through all stock operations 
— by pre-arranged sales of the stock. Outsiders 
are then told that there is money in it, and 
they begin to buy. The stock is duly "sup- 
ported," an indispensable precaution — that is, 
it is taken at quotation prices when offered by 
outside owners, and so up and up it is marked, 
the speculative public taking large blocks in 
the belief that it is going higher, and with 
little thought of its actual value, until there 
comes a time when the original supply has 
been exhausted, and the shares are no longer 
supported, and down, down they go. The real 
value of the stock has little to do with its nego- 
tiations. In the light of this explanation, there 



THE NEW YORK STOCK EXCHANGE 141 

is no difficulty in comprehending how certain 
great financial magnates, who are leading 
operators in Wall Street, have amassed such 
colossal fortunes. They have been stock 
manufacturers as well as stock dealers. The 
New York Exchange has been their field of 
operations, their market-place. Through it 
they have sold their wares. Had they, like 
ordinary speculators, confined themselves to 
other people's goods, it is questionable whether 
they would have grown exceptionally rich. 
They might have become poor, as most of their 
associates have done. But when, with con- 
sciences conformable to their opportunities, 
they had the means of selling water at high 
figures and in practically unlimited quantities, 
it is no wonder that their fortunes swelled to 
fabulous proportions. There are many legit- 
imate, lawful and legally controlled exchanges 
whereon speculation to any large extent is con- 
ducted, but only the leading ones need be 
named. The New York Stock Exchange is a 
lawfully constituted association with absolute 
power to make and enforce its own rules and 
regulations upon its members. An application 
for membership in it is scrutinized with the 
greatest care, and the applicant must prove 
himself to be a straightforward, honest man 



i 4 2 ART OF WALL STREET INVESTING 

before he is accepted. Transactions between 
members are in most instances verbal, and as 
they amount to millions of dollars in value 
daily, confidence in each other is imperative. 
It is a rare occurrence that a dispute arises, be- 
cause of the accuracy and care exercised in 
transactions with each other, and, as a rule, 
the same honesty and methods are extended 
to their relations with customers who are not 
members. The legitimate broker is always 
solicitous for the welfare of his client, from 
selfish motives, if nothing else. A customer 
who imagines he has not been fairly and hon- 
estly dealt with has only to make complaint 
to the secretary of the Exchange, stating his 
grievance and an investigation is had, followed 
by redress and the severe discipline of the of- 
fending member, should wrong-doing be dis- 
covered. So high is the character of the Ex- 
change members that no hesitation is felt by 
the public in entrusting to their custody large 
sums of money. What is true of the New 
York Stock Exchange is also true of the Chi- 
cago Board of Trade, upon which is handled 
the vast products of the great agricultural 
West. The public should be warned against 
speculative transactions with any but mem- 
bers of regular exchanges or brokers having 



THE NEW YORK STOCK EXCHANGE 143 

permanent connections with them. The nov- 
ice is oftentimes unable to discriminate be- 
tween the legitimate and fraudulent, but there 
is an infallible test, as follows: The rules of 
the New York Stock Exchange and Chicago 
Board of Trade provide that customers shall 
receive a memorandum of each transaction 
made, which shall show the date upon which it 
was made, the price and with whom, so that if 
a client has any doubt about it, he can inquire 
of the party named on the memorandum 
whether it is true or not, or he can ask the 
Secretary of the Exchange to investigate for 
him. If the Secretary cannot confirm the state- 
ments in the memorandum, it often turns out 
that the parties who are alleged to have partici- 
pated in the transaction are frauds, masquer- 
ading as Stock Exchange members, with 
whom it is worse than folly to entrust busi- 
ness. Hundreds of them exist in New York 
City alone, who live as barnacles on the ex- 
changes, bringing ill-fame and discredit to an 
important business. 

It is a common thing for a few large specu- 
lators to combine and form a "pool" to ad- 
vance some specific stock or group of stocks, 
the idea being that "in union there is 
strength." In such combinations some one of 



144 ART OF WALL STREET INVESTING 

the members is usually designated as the 
"manager," v/ho gives all orders for purchase 
and sale. The business is generally given to a 
number of commission houses who transact a 
miscellaneous business, in order to keep the 
transaction under cover as much as possible, 
because publicity would probably defeat the 
plan. The stocks subject to the manipulation 
are made to look weak and strong alternately 
— weak in order to induce "short" selling, 
w^hen the "pool" is a free buyer, and strong to 
induce "outside" buying when the "pool" is a 
seller. That part of see-saw manipulation is 
continued, making the stocks active and at- 
tractive to the public, until many thousand 
shares have been accumulated. In the mean- 
time the most favorable rumors and reports 
relating to the value of said stocks are care- 
fully put forth through market letters, news- 
papers, and other well-known mediums. This 
is done for the purpose of inducing the public 
to buy, on the perfectly correct theory that 
the public does buy when it is asked to, pro- 
viding the price is high and advancing, and 
especially if it is informed that "strong parties 
are behind the deal"; when the public "comes 
in" good and strong, influenced by predictions 
of a further great advance, it gets the stock. 



THE NEW YORK STOCK EXCHANGE 145 

The "strong" parties have "unloaded," the 
public is "holding the bag," and wonder what 
is the matter. 

Recently a new form of advertising for 
"lambs" has become popular, which requires 
no capital beyond the sum needed for news- 
paper bills. The advertisement usually states 
that for a small sum, paid "weekly" or 
"monthly," the subscriber will receive "sure 
tips" on the market's movements, and that in 
consideration of one-quarter or one-half of the 
profits secured, the self-styled "Advisory 
Brokers" will handle the "deals" for the 
"lambs" who don't know how to do it for 
themselves. These "brokers" have a "sure 
thing," as they always advise one person to 
operate for the decline and another for an ad- 
vance. They are certain to make money in one 
of the transactions. It is marvellous what a 
number of otherwise cautious, careful people 
are victimized yearly in these shady opera- 
tions. 

But the Exchange is nevertheless very use- 
ful and necessary in supplying quotable values 
and furnishing a ready market for all classes 
of securities. This important function of the 
Exchange is well brought out in a paragraph 
taken from Chas. A. Conant's recently pub- 



146 ART OF WALL STREET INVESTING 

lished book, "Wall Street and the Country." 
Says Mr. Conant: 

"One of the most persistent of the halluci- 
nations which prevail among people other- 
wise apparently lucid and well informed, is 
the conception that operations on stock and 
produce exchanges are pure gambling. A 
moment's reflection, it would seem, might con- 
vince such persons that a function which occu- 
pies so important a place in the mechanism of 
modern business must be a useful and neces- 
sary part of that mechanism; but reflection 
seems to have little part in the intellectual 
equipment of the assailants of organized mar- 
kets. Only recently I picked up a book pur- 
porting to treat of the subject of ethics, and 
found this remarkable passage: 'If, instead of 
betting on something so small as falling dice, 
one bets on the rise and fall of stocks or on the 
price which wheat will reach some months 
hence, and if by such betting one corners the 
community in an article essential to its wel- 
fare, throwing a continent into confusion, the 
law will pay not the slightest attention. A 
gambling house for these larger purposes may 
be built conspicuously in any city, the sign 
"Stock Exchange" be set over its door, influ- 
ential men appointed its officers, and the law 



THE NEW YORK STOCK EXCHANGE 147 

will protect it and them as it does the 
churches. How infamous to forbid gambling 
on a small scale and almost to encourage it on 
a large !' 

"The writer who undertook to discuss the 
Stock Exchange in that manner in a book on 
ethics, might well have devoted himself less 
earnestly to the smaller refinements of ethical 
definition and reverted to the ancient maxim, 
'Thou shalt not bear false witness against thy 
neighbor/ What he says is a hodgepodge of 
misconceptions. If it be true that betting on 
the rise and fall of stocks be gambling, as it 
undoubtedly is, then what follows has no rela- 
tion to the first suggestion. To one having 
any knowledge of the subject-matter the two 
parts of the first sentence are inconsistent with 
each other and mutually destructive. Pure 
betting is done in bucket-shops, is of no use to 
the community, is destructive to the morals 
and pockets of young men, and cannot be too 
severely censured. But such betting is not 
confined to buildings bearing the sign 'Stock 
Exchange/ It has nothing to do with the 
legitimate processes of the exchanges. More- 
over, one cannot corner the community on any 
'article essential to its welfare' by betting in 
bucket-shops. He may perhaps do it within 



i 4 8 ART OF WALL STREET INVESTING 

certain limits by actual transactions on the 
produce exchanges, because they involve the 
right to demand delivery. If it were true, 
however, that no such deliveries were con- 
templated or could be made, as is usually the 
case in bucket-shop gambling, it would no 
more be possible to corner the supply of wheat 
by betting on its future price than it is possi- 
ble for a politician to carry the election his 
way by laying heavy odds on his candidate. 
His bets would not make votes, and merely 
betting on the prices of the commodity would 
not influence the supply. 

"The fact that such confusion of ideas pre- 
vails, and that the Stock and Produce ex- 
changes continue to be looked upon by many 
good people as a sort of adjunct of Monte 
Carlo, justifies an occasional restatement of 
in the mechanism of business. To take the 
subject up from an elementary standpoint, it is 
well to say a word regarding the function of 
stock companies. The discovery was made 
long before our time that a piece of property 
or a new enterprise could be given mobility 
and divisibility by putting the title to its own- 
ership into transferable shares. The creation 
of share companies enables the small capital of 
the essential part which these exchanges play 



THE NEW YORK STOCK EXCHANGE 149 

individuals to be gathered into large funds 
necessary to build factories and railways. It 
divides the risk of an undertaking among 
many persons, and places the enterprise be- 
yond the accidents of a single human exist- 
ence by giving it a fictitious body dowered by 
law with perpetual life." 

But in addition to being a balance-wheel to 
the business of the country, Stock Exchange 
speculation is often a disturbing factor. It 
does not even furnish trustworthy news. No- 
where is it so difficult to get reliable intelli- 
gence concerning any stock dealt in there, as 
in Wall Street. The inventiveness of the spec- 
ulative broker is something marvelous. He 
can ruin the country one hour and save it the 
next. He can blight the crops of a whole sec- 
tion, or he can fill the land with abundance. 
He can make war or he can make peace, ex- 
actly as his monetary interest demands. 
Rumor-mongering seems to be a part of his 
trade. He is the chief of liars. Perhaps he is 
the exception rather than the rule among his 
fellows— it is to be hoped that he is — but he 
is a pretty numerous exception, for all that! 
What is the consequence? Simply that when 
a financial storm threatens the country, the 
Exchange is almost certain to be the center 



150 ART OF WALL STREET INVESTING 

of disturbance. No other institution is so sen- 
sitive. It exaggerates all the symptoms of 
trouble. It sends out its alarming reports as 
the storm-cloud sends out its lightnings. 
Looking at it as the barometer of values, the 
timid naturally conclude that everything is 
lost, and thus the evil is unduly magnified. 
Wall Street is as much the natural field for 
panics as the prairie is for tornadoes. 

While the Exchange has been of advantage 
to the business interests of the country, there 
are many who have had dealings with it who 
would not testify in its favor. Of the thou- 
sands and thousands who have visited it in 
person or by proxy, and done a little business 
with it, not many are ready to rise up and call 
it blessed, except in a qualified sense. If all 
were to give their experiences, what would 
the verdict be? It is to be apprehended that 
the evidence of a very decided majority would 
not be flattering to Wall Street's speculative 
methods; that their testimony would be that 
they had found it easier to lose money than to 
make it. 

The man who says he "never speculates in 
stocks, but buys only what he can pay for," is 
a sufferer as frequently as the man who buys 
on a "margin." He is generally a "sticker" — 



THE NEW YORK STOCK EXCHANGE 151 

one who never "lets go." He buys a security 
that he believes in, and so strong is his confi- 
dence that he will not accept a generous profit 
if it is offered him, and he is still more tena- 
cious when a loss is growing. His tempera- 
ment will not admit of the possibility of an 
eventual loss, but the rule (with the exceptions) 
is that he will finally take his loss when it has 
reached its greatest proportions. Securities 
amounting to hundreds of millions of dollars 
have been carried by people who "never specu- 
late," through the depression of the past four 
years. They have paid interest on money bor- 
rowed, paid asssessments under re-organiza- 
tion schemes, and still a loss stares them in the 
face. 



Wall Street Phrases and Methods 

IN the Wall Street field many terms and 
phrases are used which are not familiar 
to the outsider and therefor require definition 
in a book of this kind. In fact, many practical 
Wall Street people, while clearly understand- 
ing the meaning of such and such a phrase or 
word, cannot always concisely define it, or con- 
vey its exact meaning to the inquirer. In the 
following pages the chief terms and phrases 
relating to the modes and general mechanism 
of the Street are briefly defined and explained. 
The various words or phrases are taken up in 
alphabetical order. 

Arbitrage. The buying and selling of the 
same security in different markets, as New 
York and London, or New York and Chicago, 
for the purpose of making a profit from the dif- 
ference in quotation between the two markets. 
This trading is of course based on temporary 
differences in prices between the markets, 

i53 



154 ART OF WALL STREET INVESTING 

which are due from some special cause. If all 
things were equal every stock would, of course, 
have the same value in every market in which 
it is dealt in. There are two kinds of arbi- 
trage dealings in stocks between New York 
and London. One operation is known as the 
"spread" and the other the "back-spread." 

Averaging. This is a speculative term which 
is used to describe purchases or sales of stock 
which are made when the market is rising or 
falling, as the case may be, for the purpose of 
improving the position of the buyer or seller 
in the matter of his average price for all his 
securities. For instance, if ioo shares are pur- 
chased at 96 and the price declines to 75, the 
averager will purchase another hundred shares 
at 75, thus bringing the average cost of his 
total holdings to 85. Hence, as soon as the 
price of the stock recovers to over 85 he will 
have a profit on his entire transactions. 

Bear. This is the name for a speculator who 
sells stock short in expectation of buying it 
back at a lower price. In order to do this he 
of course borrows a certificate to deliver 
against his sale, and when he has bought in or 
"covered" he uses the new bought certificate 
to repay the loaner. 

Bill of Exchange. This is a written order or 
request from one person to another for pay- 



STREET PHRASES AND METHODS 155 

ment to a third party, the amount paid being 
charged to the one who issues or signs the 
bill. There is in reality no difference between 
a "bill of exchange" and an ordinary draft, but 
the former term is commonly applied to an 
order for money payable in a foreign country, 
whereas the same sort of order payable within 
the country of its origin is known as a "draft." 

Blind Pool. A blind pool in the stock mar- 
ket is one where the members join together 
and contribute capital, agreeing that only the 
manager shall have full charge of the pool and 
know in what way the money is to be used. 
Blind pools are not confined to stocks but may 
be carried on in a scheme of almost any nature. 

Bobtail Pool. This is a term which usually 
applies to a small or informal pool in stocks. 
In such cases the members join together to 
move the stock either up or down and then 
each is usually allowed to suit his own pleas- 
ure in closing out his interest in the pool. 

Bucketing. This is a term used to describe 
sales made by a broker for his own account 
and risk against customers' purchases or pur- 
chases by the broker against customers' sales. 
It is a reprehensible practice and is usually 
done to enable the broker to speculate against 
his customers' trades. In such instances the 



i 5 6 ART OF WALL STREET INVESTING 

broker wins if his customers lose, or he loses 
if his customers win. 

Bucket Shop. This is a place usually adver- 
tised as a brokerage office where bets are made 
on regular stock exchange quotations. No 
actual transactions take place. Usually money 
is put up by the customer and a commission is 
charged for buying and selling the same as on 
a regular exchange. When the quotations 
show a profit to the customer, he is privileged 
to demand his profit ; when the limit of the cus- 
tomer's margin has been reached in the price of 
the stock, the customer has lost his bet and his 
money and is "wiped out." 

Call. A call on a stock is a contract or 
agreement binding the issuer to deliver to the 
holder of the call the stock named therein 
within a certain time, at a certain price, if the 
holder shall so demand. For instance, the one 
issuing a call will agree to deliver one hundred 
shares of a specified stock within thirty days 
at no if the purchaser makes a demand for it. 
Should the stock be selling at 106 the issuer 
of the call may be able to sell his promise for 
$100. The purchaser of the call will then hold 
the same, and if the stock rises above in with- 
in the thirty days he will call upon the issuer 
for the hundred shares at no and probably sell 



STREET PHRASES AND METHODS 157 

the same in the market at or over in, thus 
realizing a profit. A contract of the same kind 
applying to the short side of the market is 
known as a "put." 

Corner. A corner in a stock is caused by 
the purchase by a pool or other interest of all 
the floating or purchasable stock of the com- 
pany, after which the price can be advanced at 
the will of those creating the corner. Specu- 
lators who are short of the stock and are un- 
able to buy or borrow to make delivery or 
return stock which they have borrowed, are 
thus forced into a corner and "squeezed." 
They must settle with the buyers at the buy- 
ers' own prices. 

Covering. This is a term used in the stock 
market to describe the act of buying stocks or 
commodities for the purpose of closing short 
contracts, that is to say, buying back stocks 
previously sold but which were not possessed 
when sold. 

Due Bill. In stock exchange parlance a 
due bill is a promise to pay a dividend which 
has been declared but has not yet been paid 
by the company. For instance, a stock cer- 
tificate may be purchased in the market after 
the transfer books of the corporation have 
been closed, or the transfer of the stocks may 



158 ART OF WALL STREET INVESTING 

not have been made, but by agreement the 
dividend is to go to the purchaser, and not to 
the party in whose name the certificate stands. 
When the dividend is paid to the original 
party the due bill is presented to him and he 
passes the dividend over to the purchaser. 

Flat. This signifies "without interest." 
When bonds are sold flat no charge is made 
to the buyer for the accrued interest, as the 
interest is included in the price of the bond. 
On the New York Stock Exchange all bonds 
aire sold at "fiat" prices, but in private trans- 
actions a large majority of the sales are made 
on an "accrued interest" basis. The term 
"flat" is also used in relation to the lending of 
stocks. When stocks are lent flat the lender 
does not pay interest to the borrower of this 
stock. Otherwise the borrower will pay the 
lender the market value of the stock and the 
lender will pay interest to the borrower on his 
money. 

Giving up. This term is used in the stock 
markets to describe a broker who executes an 
order for another broker and whose connec- 
tion with the transaction then ends. In re- 
porting to the broker to whom he sells or 
from whom he buys the name of the broker 
for whom he is acting, he is said to "give up" 



STREET PHRASES AND METHODS 159 

the latter. The latter receives the stock and 
completes the transaction. 

Hypothecation. This signifies the pledging 
of securities or other property as collateral for 
loans. In Wall Street, where stocks are pur- 
chased on margin and carried by a broker for 
his customer, they are usually hypothecated, 
or deposited as collateral in loans with banks 
or trust companies or other loaners of money. 
It is in this way that the broker secures the 
capital to carry the stocks for his customer. 

Irish Dividend. This is a term sometimes 
used to describe not a dividend, but an assess- 
ment on a stock. 

Joint Account. The term for a transaction 
in which two or more brokers or speculators 
join together for their mutual benefit or risk 
in the carrying through of a transaction. 

Long of stocks. This is the phrase used 
when a speculator is a bull ; that is to say when 
his account shows a balance of stocks on the 
long or bull side. The opposite condition is to 
be short of stocks and be on the bear side. 

Manipulation. This word applies to the 
operation of working stocks both up and down 
on the exchanges, both ways at once. A well- 
known method of manipulating a stock is to 
put through on the exchange a number of fie- 



160 ART OF WALL STREET INVESTING 

titious sales, one broker agreeing to purchase 
at a certain price from another and the latter 
then agreeing to repurchase the same stock at 
the same or another price. This arrangement 
is sometimes carried on between various brok- 
ers, each transaction being offset in some way 
by another. As a result there may be a large 
number of quotations reported with no actual 
sales. These quotations are commonly known 
as "wash" transactions, and the purpose usu- 
ally is to create outside interest in the stock 
and start a speculation in it among genuine 
buyers and sellers. 

Margin. This is the word used to describe 
money deposited with a broker for specula- 
tion in stocks, grain or other commodities. In 
stocks the margin required ranges from 5% to 
30%, dependent upon the character of the 
security purchased. The average margin is 
10%, which amounts to $1,000 on the ordinary 
one hundred shares of stock. The margin pro- 
tects the customer down to a price ten points 
below the price he has paid, if he is long of 
stock, and ten points above the price he has 
received if he is short of the stock. As his 
margin becomes narrower because of the 
change in the market prices he is required to 
put up more money or else have his account 
closed out. 



STREET PHRASES AND METHODS 161 

Outside broker. This term describes a 
broker who is not a member of the regular 
exchange, but who deals in securities either on 
the streets or elsewhere. In New York City 
an outside broker is one who deals in what is 
known as the outside market or on the curb. 
There are nowadays a very large number of 
stocks and bonds which are traded in in this 
outside market, and these outside brokers usu- 
ally conduct just as legitimate a business as 
those who make trades on the stock exchange. 

Passing a dividend. This does not mean 
declaring a dividend, as many people assume, 
but it means failure to declare a dividend that 
had previously been regularly paid. When the 
company specifically states that it will not pay 
a similar dividend to that which previously 
had been paid, then it is said that the dividend 
is stopped. But when no official action is taken 
and the dividend simply is not declared by the 
directors, it is said to have been "passed." 

Privilege. This is a general name for a call, 
a put, a spread or a straddle, information as to 
each of these terms being supplied under their 
own headings. In any kind of a privilege the 
purchaser of the same is not liable for loss be- 
yond the amount actually paid for it. 

Put. A put on a stock is the reverse of a 
call, being a written contract or agreement 



162 ART OF WALL STREET INVESTING 

binding the issuer to receive from the holder 
the stock named in the agreement within a 
certain time at a certain price if the holder 
shall so demand. The act of delivering such 
stock to the issuer of the contract is generally 
known as "putting" the stock. 

Pyramiding. This describes operations by 
the use of paper profits made in transactions 
not yet closed and, therefor, not yet in hand. 
For instance, one may purchase one hundred 
shares of stock at 50 on a margin of 10% of the 
par value. If the stock advances to 60 the pur- 
chaser will then have 20% margin and he will 
purchase one hundred shares more. If the 
price then goes to 70 he will purchase two hun- 
dred shares more, giving him four hundred in 
all. If it next goes to 80 he will then purchase 
four hundred shares more, giving him eight 
hundred shares in all, on which he has a mar- 
gin of 10%, or $8,000. Up to this point his 
paper profits will be $7,000. If the market con- 
tinues in its rise he will continue accumulating 
stock, until his account shows very large ac- 
cumulated paper profits. If he then sells out 
he will have turned his profits into cash, but 
if the market suddenly drops ten points he will 
not only have lost the profit on the last trans- 
action, but will have lost everything. In other 



STREET PHRASES AND METHODS 163 

words, the inverted pyramid will have fallen 
and ruined him in the crash. 

Spread. A spread is a put and call combined 
and is practically the same as a straddle. If 
the stock goes below the price named in the 
put end, plus the cost of the spread, the holder 
makes a profit; also if the stock gees above the 
price named in the call end, plus the cost of 
the spread, the holder of the spread also profits. 
In other words, the purchaser of a spread is 
said to "play the two ends against the middle" ; 
he has two chances to make money and his 
loss in any case is limited to the cost of the 
spread. 

Straddle. A straddle is similar to a spread 
with the exception that only one price is named 
in it. The stock may be called for or delivered 
at this one price only. As in the other cases, 
the stock must go up or down more than the 
amount paid for the straddle before there is a 
profit in it. 

Under the rule. This is a term used to 
describe an official transaction made on the 
New York Stock Exchange. In case a mem- 
ber of the Exchange fails to receive or deliver 
stock in accordance with his contract of pur- 
chase or sale, the stock in question is bought 
or sold, as the case may be, by the chairman of 



164 ART OF WALL STREET INVESTING 

the Exchange for the account of the delin- 
quent member, and any difference in cost is 
charged or credited to him. When transac- 
tions of this kind are put through they are 
known as purchases or sales made "under the 
rule." 

Washing. This term describes the operation 
of simultaneous buying and selling the same 
stocks for the purpose of making quotations 
and inducing outside speculation or interest in 
the stock by imparting apparent activity to it. 
Washing is usually employed when manipula- 
tion of some kind is in progress. 

Watered stock. A term used to describe the 
capital stock of a company which is not sup- 
posed to be represented with a corresponding 
amount of assets. The term as used is a vague 
one and is subject to several interpretations. 
For instance, when a stock dividend is de- 
clared the original stock is said to be watered 
to that extent, unless the newly issued stock 
represents added property or value in some 
form. 

Ex-dividend. When a stock upon which a 
dividend has been declared is sold and the 
price is not to include the amount of the divi- 
dend to be shortly paid, the stock is said to be 
sold "ex-dividend." 



STREET PHRASES AND METHODS 165 

In Wall Street no one is always right ; cheap 
advice is plentiful; some men learn only by 
failing; losses make us more cautious; inter- 
rogate before you negotiate; money is most 
valued when lost; don't buy an egg until it is 
laid ; fraud is built on misrepresentation ; spec- 
ulation begins when certainty ends; oppor- 
tunity is often lost by deliberating; get infor- 
mation before you invest, not after; get an 
investment that will let you sleep ; it is idle to 
wait for your ship to come in unless you have 
sent one out; those who lament their mis- 
fortunes are generally they who do not recog- 
nize their opportunities; buyers of stock be- 
long to two classes: those who trade on ten- 
dencies and who take hold wherever the mar- 
ket is active without much reference to values 
or prices, and those who always try to buy 
when prices are down instead of when they are 
up. 

In Wall Street the investor determines the 
prices of stocks in the long run. This state- 
ment is sometimes disputed by those who? 
point to the fluctuations which are confessedly 
made by manipulators without regard to value. 
It is true that such fluctuations do occur, but 
when the manipulation is over the influence of 
the investor is again felt. If he decides that a 



166 ART OF WALL STREET INVESTING 

given stock is worth only so much the manipu- 
lator will ultimately be compelled to accept 
that valuation, because manipulation cannot be 
kept up. The general object of manipulation 
is to buy below value and sell above value. 

"An important influence of the stock ex- 
changes, and in some ways also of the produce 
exchanges, is the influence they exert upon the 
money market. The possession by any coun- 
try of a large mass of salable securities affords 
a powerful guarantee against the affects of a 
severe money panic. If in New York there 
arises a sudden pressure of money, so that con- 
fidence becomes impaired and people having 
contracts entitling to future or immediate de- 
livery of money insist that these contracts 
shall be executed in money instead of other 
forms of promises, what happens? The banks 
call in loans and begin to hold their cash. If 
they hold large quantities of securities salable 
on the London, Paris or Berlin market a cable 
order v.lil affect the sale of these in an hour, 
and the gold proceeds will be on their way 
across the Atlantic in a day. 

"Wonderful has been the effect within the 
last twenty-five years of this steady influence 
of .the stock market upon the demand for 
money and upon the smoothness of the opera- 



STREET PHRASES AND METHODS 167 

tions of the mechanism of the exchanges. 
What has just been put in a crude form by 
referring to a crises occurs daily and hourly on 
the stock exchanges, and prevents sudden con- 
traction and expansion in the rate for loans. 
The manufacturer goes placidly on paying his 
four or five per cent, for commercial loans, 
when if there were no stock exchanges where 
securities could be sold in one market at a 
slight profit over another, he would find that 
his bank was first charging seven or eight per 
cent., then dropping to three or four and then 
going back to eight. By means of the facilities 
which the stock market affords for placing 
credit instantly at the command of one market 
or another the pressure for money is miti- 
gated, and has put a limited effect upon the 
commercial borrower. Such pressure as now 
occurs is transferred to the borrower on call 
— the broker in stocks, who thus acts as in- 
surer for the commercial borrower. This in- 
fluence of the stock market has much the effect 
of a buffer upon the impact of two solid 
bodies. Crises are prevented when they can 
be prevented, and when they cannot they are 
anticipated, and their force is broken into a 
mild succession of ripples instead of a tidal 
wave."— Chas. A. Conant, "Wall Street and 
the Country." 



"A man's learning dies with him; 
even his virtues fade out of remem- 
brance; oat the dividends on the 
stocks he bequeaths to his children 
live and keep his memory green." 
—Holmes. 



INDEX 



Page 

Analyzing Railroad securities 75 

Arbitrage, definition of 153 

Arkansas Central Ry 16 

Assumed bond 43 

Averaging, defined 154 

Bear, defined 154 

Bill of Exchange, defined 154 

Blind pool, defined 155 

Bob tail pool, defined 155 

Bonds and what they represent 33 

Bucketing, defined 155 

Bucket shop, defined 156 

Call, defined 156 

Capital assets 91 

Capital liabilities 94 

Carnegie, Andrew 32 

Centralia & Chester R. R 10 

Collateral trust bond 39 

Common stock 60 

Conant, Chas. A., quoted 146, 166 

Consolidated mortgage bond 36 

Construction account 91 

Convertible bond 40 

Corner, defined 157 

Covering, defined 157 

Cumulative stock 64, 74 

Currency bond 55 

Current assets 93 

Current liabilities 95 

Debenture bond 38 

Debenture stock 66 

Delaware, Lackawanna & Western Ry 67 

Divisional bond 44 

Due bill, defined 157 

Earning power of railroads 84 



INDEX 

Page 

Equipment bond 54 

Equipment statistics 83 

Ex dividend, definition of 164 

Extended bond 50 

Financial characteristics 90 

Financing industrials 70 

First mortgage bond 33 

Fixed charges 88 

Flat, definition of 158 

Franchises 100 

Get- Rich-Quick schemes Ill 

General mortgage bond 37 

Giving up, definition of 158 

Guaranteed bond 41 

Guaranteed egg swindle 112 

Hypothecation, defined 159 

Income bond j 45 

Investment versus speculation 105 

Irish dividend 159 

Joint account, defined 159 

Joint bond 40 

Judging railroad stocks 67 

Long of stocks, definition of 159 

Manipulation, defined 159 

Margin, defined 161 

Mining sharpers 116 

New York Stock Exchange, described 135 

Non-cumulative stock 64 

Operating expenses 86 

Outside broker, definition of 161 

Participating bond 53 

Passing a dividend 151 

Physical characteristics of railroads 77 

Preferred stock 63 

Prior lien bond 38 

Privilege, defined 161 

Public Service Corporation of New Jersey. 101 

Put, defined 161 

Pyramiding, defined 162 

Reading Company 4s 10 

Refunding bonds 51 

Reorganizations and syndicates 125 

Rock Island Co 58 

Safety & Security 9 



INDEX 

Sea water gold swindle 113 

Second mortgage bond 34 

Sinking fund bond 47 

Spread, defined 163 

Stocks and what they are 59 

Straddle, denned 163 

Ten dollar investors 118 

Third mortgage bond 35 

Tractions and industrials 99 

Train mileage 82 

Underlying bond 51 

Under the rule, definition of 163 

Unearned increment 101 

United States Steel Corporation 102 

Washing, defined 164 

Watered stock, defined 164 

Woodlock, Thcs. F., quoted 75 



Moody's Magazine 

The National Investors' Monthly 

$3.00 35 Nassau Street 25 CENTS 

A YEAR New York a COPY 



Moody's Magazine occupies a unique place as a 
specialized publication devoted exclusively to the 
interests of the investor in securities. In its 
pages are discussed, monthly, the fundamental 
causes of market movements and the principles of 
safe investment. It does not disseminate tips nor 
does it encourage speculation in the ordinary 
sense of that word. Its arm is to safeguard the 
investor and to teach him to think for himself. 
Moody's Magazine contains every month: 

An editorial review of current events in which 
a careful, unbiased and interesting analysis of cur- 
rent investment and general conditions is made in 
such a way that the average man is always able to 
comprehend them. 

Analytical, descriptive and historical articles on 
railways, industrial corporations and kindred 
topics. 

Special articles by well-known financial experts 
and economists on such topics as the tariff, the 
currency, railroad rate regulation, gold deprecia- 
tion, questions which vitally affect the securities 
markets. 

Educational articles on the various phases of 
bonds, stocks, mortgages and other forms of in- 
vestment, on Wall Street and its methods and on 
other subjects interesting to the investor. 

Regular departments covering life insurance, 
the mining and metals markets, public accounting, 
legal decisions affecting investments, financial 
diary of the month, stock record of the month; 
monthly letters from Washington, London and 
Montreal, and a section devoted to answers to 
subscribers' questions on specific investments. 



"We Investors' Catechism 



By MARC M. REYNOLDS 



How Are Stocks Manipulated? What Is a 
Bucket Shop? How Stocks Are Bought on Mar- 
gin. Meaning of Puts, Calls and Privileges. 
What Is a Debenture Bond? How to Legally 
endorse a Stock Certificate. What Are Bank 
Clearings? What Is a Bear? A Bull? What Is 
the Curb Market? What Is a Wall Street Deal? 
What Is a Funded Debt? 

These and thousands of other questions im- 
portant to the investor are answered in 'The In- 
vestors' Catechism." This book is invaluable to 
the investor unfamiliar with the ways and meth- 
ods of Wall Street. 
Bound in Cloth, with Gilt Title . . $i.co 



We Cycles §f Speculation 

By THOMAS GIBSON 



This book was written with the intention of en- 
tering a little further into the great questions of 
speculation and investment than "The Pitfalls of 
Speculation," by the same author. Among the 
subjects treated in the various chapters may be 
mentioned the Effect of the Gold Supply on Prices 
of Securities and Commodities; the Effect of Such 
Factors as Politics, Crops, etc.; Puts and Calls, 
the Question of Dividends, Effects of Business 
Depression, Best Methods of Trading, etc. 
Bound in Blue Cloth, with Gilt Title . $1.50 



MOODY'S MAGAZINE 

35 Nassau Street New York City 



Smith's 
Financial Dictionary" 

(Second Edition) 
By HOWARD IRVING SMITH 



A financial dictionary is as indispensable 
to the investor as a Webster's dictionary is 
to the common man. Smith's Financial 
Dictionary is the most complete that has 
yet been published. It defines every finan- 
cial term in use in the United States or in 
Great Britain, so clearly that no reader can 
misinterpret it. It is really an encyclopedia 
of finance. It treats under proper titles the 
whole range of banking, money, credit, 
stocks and bonds, commercial paper and 
other negotiable instruments, domestic and 
foreign exchange, and speculation in stocks 
and commodities. A summary of the mone- 
tary systems of the world is included, to- 
gether with a table showing the monetary 
designations of the various countries of the 
world and their equivalent in United States 
money and in English money. It also in- 
cludes compound interest tables and tables 
showing the returns from investments at 
different prices and at different rates of in- 
terest or dividend. In short, it omits nothing 
which might facilitate financial transactions 
by conveying a comprehension of financial 
facts, practices and expressions. 
Cloth, 543 pages $2.00 

MOODY'S MAGAZINE 

35 Nassau Street New York City 



How Money is Made in 
Security Investments. 



By HENRY HALL. 



The only book which enables an investor to 
judge for himself the end of bull and bear mar- 
kets. Shows how the great captains of finance 
have grown so rich and how any man with a 
regular occupation to depend upon for a liveli- 
hood can invest his surplus earnings with a 
prospect of at least a moderate fortune at middle 
age. 

For twenty-six years connected with the New 
York Tribune, Mr. Hall has been a close student 
of the security markets and the lessons taught in 
his book are based on a quarter of a century's 
practical experience. 
Cloth . r . f . »■ $1.50 



Around the Caribbean 
and Across Panama. 



By FRANCIS C. NICHOLAS, Ph.D. 



Author of Mining Investments and How to 
Judge them. 

The thrilling adventures of a Mining Engineer 
in the wilds of South America. A true account 
of Dr. Nicholas's own experiences in seeking the 
hidden treasures of the continent which made 
Spain rich. Illustrated with Maps and beautiful 
half-tone photographs of places and people. 
Cloth . ... . . . w m $2.00 



MOODY'S MAGAZINE 

35 Nassau Street New York City 



THE WALL STREET LIBRARY. 

Volume I. The A. B. C. of Wall Street. 

By S. A. NELSON 

Explains the working of the Stock Exchange 
and Stock Exchange Speculation in clear, simple 
language which any one can understand. 

Volume II. The Anatomy of a Railroad Re- 
port and Ton Mile Cost. 

By THOMAS F. WOODLOCK 

The explanations contained in this volume are 
worth cold cash to any one who reads them. 

Volume III. The Theory of Stock Speculation. 
By ARTHUR KRUMP. 

Explains technical terms, shows the causes that 
influence the markets, tells how to speculate suc- 
cessfully. 

Volume IV. The A. B. C. of Banks and Banking. 
By GEORGE M. COFFIN 

Gives a simple and concise explanation of the 
principles and practice of banking in the United 
States. 

Volume V. The A. B. C. of Stock Speculation. 
By S. A. NELSON 

An expert study and explanation of specula- 
tion, past and present, showing the various 
methods of speculation and pointing out which 
methods are more likely to succeed and why? 

Volume VI. The A. B. C. of Options and Arbi- 
trages. 

By S. A. NELSON 

A full and clear exposition of these important 
subjects, giving the usages of the London Stock 
Exchange, methods of trading between New 
York and London and stock conversion tables. 
Six Volumes, in Cloth .... $3.50 
Single Volumes ..... .60 

MOODY'S MAGAZINE 

35 Nassau Street New York 



The Portland Cement Industry 
From a Financial Standpoint 

By EDWIN C. ECKEL, 

Author of "Cements, Limes and Plasters," and 
until recently in charge of the cement work 
of the United States Geological Survey. 
The only book which shows the possibilities 
and pitfalls of investments in the securities of 
cement producing concerns. Invaluable to the 
banker who is invited to aid in the flotation of 
cement securities and to the investor who is in- 
vited to buy them. 

CONTENTS 

I. The History of the Portland Cement Indus- 
try. II. The Growth of the American Cement In- 
dustry; Statistical. III. The Outlook for the 
Future. IV. Factors Influencing the Valuation of 
Cement Securities. V. The Methods and Profits 
of Cement Promotion — Impending Flood of 
Cement Securities; Profits of Cement Promotion, 
Their Source and Amount; Misstatements of 
Cement Prospectus Writers. VI. Capitalization 
of Cement Companies — Basis for Reasonable Cap- 
italization; Minimum Possible Capitalization; 
Maximum Satisfactory Capitalization; Actual 
Capitalization of Existing Companies. VII. Cement 
Bond Issues — General Status of Industrial Bonds; 
Bond Issues Against Established Plants; Bond 
Issues Against Unbuilt Plants; Typical Cement 
Bond Offerings; Security Offered for Bond Is- 
sues; Earning Power Back of the Security. VIII. 
Profits and Losses of Cement Manufacture — Ac- 
counts of a Lehigh District Cement Company; 
Accounts of a Michigan Cement Company; Divi- 
dends of Two Established Companies; The 
Chance of Success and Failure. 
Bound in Blue Cloth, Gilt Title . . $2.00 



MOODY'S MAGAZINE 

35 Nassau Street New York City 



MOODY'S ANALYSES OF 
RAILROAD INV ESTMENTS 

By JOHN MOODY 

Containing in detailed form an expert compara- 
tive analysis of each of the Railroad S3 r stems of 
the United States, with careful deductions, en- 
abling the banker and investor to ascertain the 
true values of all Railroad Securities. 
ISSUED ANNUALLY 

The book consists of about 600 pages, 8 inches 
by 11 inches in size. It explains and applies in 
clear and simple form, the proper methods for the 
analysis from the standpoint of the Banker and 
Investor, of the various kinds of railroad securi- 
ties issued by the different railroad corporations, 
from the Highest Grade Bonds to the Most Spec- 
ulative and Cheapest Stocks. Practically all the 
Railroads of the United States are covered, com- 
plete analyses, worked out on thoroughly sound 
and scientific lines, being presented in uniform 
style regarding all. By the method employed, the 
user of the book is enabled to ascertain at a 
glance the position and approximate true value 
(as based on actual results) of any of the 1,500 or 
more bond issues covered, as well as the several 
hundred stock issues which represent over 90 per 
cent, of the stock capitalization of the Railroads 
of the country. 

The book will be issued early in each year, thus 
furnishing a permanent record of the changes 
from year to year in the values of all securities of 
American Railroads. It presents a vast compara- 
tive view of the railroad results in this country 
for ten years, completely covering ail sides, physi- 
cal, operating, income, earning power, and finan- 
cial, and showing the strength or weakness of all 
the varied security issues in connection with these 
results. 

$12 a Copy; $12.50 Delivered 



MOODY'S MAGAZINE 

35 Nassau Street New York City 



Thomas Gibson's Market Letters 



This Advisory Service Consists Of: 

1. — A daily letter mailed at 3.30 P. M. 

2. — A weekly letter covering general business conditions, 
crop conditions, the technical situation and offering sugges- 
tions for operations during the coming week. 

3. — A special letter weekly covering whatever topic is most 
vital. 

4. — A special letter weekly on crop conditions during the 
season. 

5. — Analysis of the reports of leading corporations as they 
appear. 

6. — A weekly booklet of price records, dividends, income 
yield, etc. 

7. — A monthly booklet of charts. 

8. — A daily table of average stock prices (Rails and Indus- 
trials). 

9. — Occasional telegrams regarding important changes. 

10. — Privilege of a reasonable number of inquiries by mail 
or telegraph. 

The subscriber to this service may rest assured that every 
question affecting future values and prices of securities will 
be thoroughly covered. 

These letters deal particularly with securities. Grain and 
Cotton are also briefly touched on. While I attempt to gain 
the most dependable opinions on commodities, the advice 
offered is not based on personal investigation. 

THE PRICE OF THE SERVICE IS AS FOLLOWS: 

COMPLETE SERVICE f One month $10.00 

AS DETAILED ABOVE ( j£ e ^;.7.7; \ [ [ [ ftJS 

COMPLETE SERVICE f £. ne mon ^ $j>.00 

— months 20.00 



(EXCEPT DAILY LETTER) | gne year. . \ \ \ \ \ \ \ \ \ zl.ol 

New subscribers also receive a complete set of "Thomas Gib- 
son's Library of Speculation and Investment" in seven 
volumes. These books are described on another page. The 
library is not given as a "premium," but as a portion of the 
service, the object being to acquaint clients with the methods 
employed. 



THOMAS GIBSON 

Corn Exchange Bank Building, New York 



185 Jackson Boulevard, Chicago, 111. 



Gibson's Manual 



Price $5.00 



A TIME-SAVER 

for 

Bankers, Brokers, Investors, Speculators 

150 Railroad, Industrial and Mining Corpora- 
tions Under Separate Heads 



High-Low " 
Charts 



Covering 
Period 



Dividends j Since 
Earnings J 1900 

And Other Useful Information 

400 Pages 

Type Large and Attractive 



THE GIBSON PUBLISHING CO. 

15 William Street, New York 
185 Jackson Boulevard, Chicago 



